With Europe's benchmark interest rates still staunchly in negative territory, the long-suffering European banks, epitomized by fading German 'national champion' Deutsche Bank, have benefited from the surge in trading activity during the first half of 2020 that helped its Q1 results surprise to the upside.
But as DB CEO Christian Sewing explained in an interview with Bloomberg published Tuesday, that boost from trading revenues and the explosion of debt issuance that has provided some badly needed wiggle room to Sewing as he continues with his epic "turnaround" of Deutsche unfortunately wont' last.
Deutsche Bank AG’s booming trading desks are set to see the frenetic activity of the first six months ease as the exceptional market situation created by the coronavirus ebbs, according to Chief Executive Officer Christian Sewing.
The German lender will see a slowdown in the second half after benefiting from continued momentum in markets through June, Sewing said during a webcast hosted by Bloomberg News on Tuesday. While the bank is on track or ahead on its restructuring plan despite the pandemic, he said, debt capital markets is one area that’s set to decelerate in the coming months.
Sewing is one year into a radical overhaul that rolled back much of Deutsche Bank’s aggressive expansion as a global investment bank to focus on its traditional business of corporate banking, though recently he’s relied more heavily on revenue from fixed-income trading. The lender had a strong start first half in its securities business as debt security issuance boomed and clients sought hedges in volatile markets.
"The investment bank is clearly on track,” Sewing said, adding that was also in part due to its change of emphasis and not just market volatility in the first six months. In the second half, “there will be for sure a little bit of slowdown” because not all factors that helped in the recent period will be repeated.
To try and mitigate the lapse, Sewing said the bank will continue to expand its IG credit business as the bank seeks to restore the franchise to its former glory, or at least some semblance of what it once was.
DB's trading unit saw a 13% gain in revenue in Q1, though that was less than its US competitors.
Of course, the real takeaway here, as one analyst pointed out, is that, if DB sees a pullback in trading revenue, it's going to need to compensate for that in other areas. Which is where passing the costs of negative interests rates on to customers comes into play. Back in April, the bank finally broke and started adding charges to accounts over €100,000.
Bottom line: If the decline that Sewing's warning about comes to pass, any Germans who haven't already should consider buying a safe.