Deutsche Bank AG reported a 30 percent slump in third-quarter trading revenue, twice as much as the decline at its U.S. peers, as Europe’s largest investment bank keeps losing ground to rivals.
The slump, driven by lower fixed-income trading, contributed to a 10 percent decline in revenue, the third straight quarter of contraction, Frankfurt-based Deutsche Bank said Thursday in a statement. Net income more than doubled to 647 million euros ($766 million), beating the 278.6 million-euro average estimate of seven analysts, as the lender slashed non-interest expenses by 14 percent.
“The question of investment banking revenue weakness won’t go away,” said Ingo Frommen, an analyst at Landesbank Baden-Wuerttemberg who has a hold recommendation on the shares. “The trading results were very negative and they won’t silence the discussion about how management can get a handle on this issue.”
Chief Executive Officer Cryan, 56, has come under pressure from investors as he struggles to deliver on a pledge made in March, when he unveiled the bank’s third strategy in as many years, to return to “controlled” growth. While he settled legacy misconduct cases, reduced risk in the securities unit and raised fresh capital, the bank hasn’t won back all clients who reduced business last year. That’s made an industrywide slump in trading worse for Germany’s largest lender.
“We are convinced that the benefits of our efforts will step by step become more apparent in the coming quarters and years,” Cryan said in the statement. Revenue was hurt by a “challenging” trading environment that continued in the fourth quarter.
Investor Pressure
Deutsche Bank’s shares lost 5.6 percent this year through Wednesday, the sixth-worst performance among the 44 members of the Bloomberg Europe 500 Banks and Financial Services Index.
Three of the 10 largest stakeholders in the bank, speaking earlier this month on condition of anonymity, said they want to see a turnaround in the next few quarters, particularly in the trading business, to continue to back Cryan. Revenue has fallen in all but two quarters since he took over in 2015.
While top-line growth remains elusive, Cryan said a plan to sell parts of the asset management business and combine the bank’s consumer banking units remains on track. Deutsche Bank will integrate its Postbank retail business with its private and commercial bank by the end of the second quarter, it said today, though both brands will continue to operate. The lender expects annual cost savings from the combination of approximately 900 million euros from 2022, and cost of about 1.9 billion euros in restructuring and other investments.
The lender also said it will absorb Sal. Oppenheim’s wealth management business into its own business in the first quarter of 2018 and that the brand will cease to exist. Cryan said in a memo to staff that the bank was unable to restore the brand’s strength after acquiring it.
Cost Cuts
Cost cuts, meanwhile, are helping boost the bottom line. Headcount declined by about 4,000 over the past twelve months, according to a presentation. That was partly offset by higher accruals for variable compensation as the banks seeks to attract and retain talent following the biggest bonus cuts in its recent history.
“We’re satisfied to see the restructuring process moving ahead with the plans for the asset management unit and Postbank integration. Costs are also coming down, both in terms of legal cases and their operating base,” Frommen said. “That’s all good, but it is too early to say we’re seeing a complete turnaround.”
Deutsche Bank this month hired Paul Huchro, a former Goldman Sachs Group Inc. partner, out of retirement to head major parts of corporate-credit trading.
Fixed income and currencies, the biggest source of trading revenue, fell 36 percent to 988 million euros in the quarter, and will be down for the full year of 2017 as the challenging environment continues, the bank said. The five biggest U.S. investment banks saw debt trading decline 22 percent in the quarter.
Deutsche Bank moved some financing business from fixed-income trading to another unit. The drop in revenue would have been 24 percent if adjusted for that change.
The two co-heads of the investment bank, Marcus Schenck and Garth Ritchie, are seeking to win back clients who reduced business with the bank late last year amid speculation about its financial strength. They’re focusing the division on corporate clients while preparing to move assets and hundreds of traders from London to Frankfurt in anticipation of the U.K.’s departure from the European Union.
Equities trading was down 16 percent, compared with a decline of 0.5 percent at the U.S. banks. Deutsche Bank this month was left holding millions of dollars in stock of Osram Licht AG, after failing to find enough buyers for a stake that Siemens AG sold in the company.
By: Steven Arons and Nicholas Comfort (Bloomberg News).
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