Is Deutsche Bank's exile to commercial bank purgatory finally over?
After a dismal stretch for the bank which started in 2014, cost two CEOs their jobs, brought the bank to the verge of nationalization in 2016, sparked an exodus of employees and saw the stock price crumble to levels that became watercooler jokes, the largest German Bank closed out a bumper year for trading with a result that put most of its Wall Street peers to shame while handing CEO Christian Sewing the first annual profit in six years as he leans increasingly on the investment bank.
First, the numbers: FICC trading extended its great run with a 17% jump in revenue (while positive momentum has continued, some analysts are less optimistic on the prospects). The impressive result was nearly double the average increase of about 10% at the five biggest Wall Street banks. And while Deutsche Bank’s fixed-income unit is smaller than those at most U.S. peers, which averaged $2.46 billion of revenue in the quarter, it contributes a far larger share to the group’s top line.
Deutsche Bank’s net income for the quarter came in at 51 million euros, compared with a 1.6 billion-euro loss a year ago, with underlying profit coming in 49% ahead of consensus, driven by lower provisions, with core divisions also beating expectations. The company's CET1 ratio, a key measure of capital strength increased, also beat analysts’ estimate, and the bank said in a presentation that it saw “robust revenue momentum” going into 2021.
More importantly, for the full year, Deutsche Bank posted a net income attributable to shareholders of €113 million, the first annual profit by that measure since 2014.
Here are the key highlights from the bank's Q4 results:
- Q4 profit of €51 mn, for an ROTE of 0.4%.
- Underlying PBT of €580 mn was above our expectation of €435 mn (33% beat vs GSe; 26% vs cons); underlying PBT for the "core bank" came in at €935 mn, vs our estimate of €818 mn (14% beat).
- Credit losses of €251 mn, or 23 bp. LLPs benefited from releases in COVID-19 related stage 1/2 provisions (€101mn), excluding those, CoR would have been closer to 32bp. CoR for the full year was 41bp, within the 35-45bp guidance.
- IB revenues were up +25% y/y, (+38% y/y in US$ ex. specific items, compared to peer group of +19%). FICC revenues came in at €1.4 bn and were +17% y/y or +31% y/y in US$ ex. specific items vs peer group of +10% y/y.
- Capital: CET1 came in at 13.6%, +30bp q/q (+50bp vs GSe/cons), benefiting from favorable regulatory changes (notably the treatment of software intangibles) and postponed regulatory RWA inflation. Leverage ratio at 4.7% was +24bp q/q (+20bp vs GSe/+40bp vs cons). The bank expects to maintain a CET1 ratio of at least 12.5%.
- TBVPS was flat q/q at €23.2 (-1% y/y), putting the stock on 0.38x trailing P/TBV.
“We did see the positive momentum continuing,” Chief Financial Officer James von Moltke said in a Bloomberg TV interview. In the trading business, “we’ve seen that momentum carry through to the first few weeks of 2021, which is encouraging for us in terms of the outlook.”
As Bloomberg notes, the boost from trading has kept Sewing’s turnaround plan largely on track even as provisions for bad loans jumped in the wake of the Covid-19 pandemic and the bank’s other businesses struggled to grow. The bank set aside €251 million for credit losses in the quarter, well below the €380MM expected, and bringing the total for the year to 1.79 billion euros.
Below are five key takeaways from the quarter courtesy of Bloomberg:
- Fixed-income trading extended its great run with a 17% jump in revenue. Positive momentum has continued, but some analysts are less optimistic on the prospects
- Halfway through Sewing’s restructuring plan, the CEO says he now wants to “shift up a gear” on revenue generation while also reducing costs further to meet financial goals for next year
- While the shares quickly reversed early gains of almost 4% and were trading lower, as several analysts noted that the results are in line with expectations and failed to provide a catalyst for excitement
- The private and corporate bank units are holding up well, even if the negative interest rates caused a decline in revenue
- Provisions for bad loans will fall this year, but still remain above levels seen before the coronavirus pandemic
The blowout earnings were welcome news for the company's employees who had gone without bonuses for several years. As BBG reported in December, the bank has been considering to raise average bonuses for its traders by 10%, but the final number may now be even higher, a person familiar with the matter has said.
“We’re obviously very mindful” of the recommendation from the European Central Bank to exercise extreme moderation on bonuses, von Moltke said. “We of course need to balance that with what was a strong performance year and the need to compensate people for that,” he said, calling the decision “an ongoing process.”
Deutsche Bank’s impressive results contrast with the performance of smaller cross-town rival Commerzbank, which doesn’t have a large trading operation to lean on. Commerzbank late Wednesday announced that it will post a preliminary loss of almost €2.9 billion for 2020 after taking big writedowns tied to the pandemic and booking restructuring charges for a massive cost-cutting program.
“It’s been a gift, frankly, to them that capital markets have held up as well as they have,” Matthew Fine, a portfolio manager at Third Avenue Management, said by phone before earnings were released. “Revenue has not deteriorated markedly and they have actually been able to build capital through this period.”