Deutsche Bank stock tumbled - again - after the bank reported its steepest drop since CEO Christian Sewing’s sweeping revamp in early July as Q3 fixed income trading results badly trailed its Wall Street rivals in the latest sign of the steep hurdles Germany’s biggest lender faces in its efforts to turn round the fortunes of its investment bank.
Revenue in the bank's once iconic fixed income group — by far the biggest remaining unit of Deutsche’s downsized investment bank — tumbled 13% year-on-year to €1.23bn.
Deutsche blamed the decline in its FICC group on low market volatility in foreign exchange markets. It also pointed to “business restructuring and challenging market conditions” in its rates unit, which handles sovereign bonds and other related products, and emerging markets debt which triggered “some risk management losses”.
The bank's new strategy - which now also includes a "bad bank" to house its troubled assets - marks the biggest cutback to the investment bank since Deutsche Bank built up the business in the 1990s. While top shareholders and regulators have signaled support, analysts have warned of execution risks. The bank already had to walk back a revenue target as the slowing economy made it unlikely that interest rates will rise soon.
The punchline: the investment bank’s overall pre-tax profit tumbled 73% to €64 million; due to a change in its financial reporting structure and the restructuring, analysts could not even reach a consensus on what the number should be prior to the quarterly results, so it wasn't clear if this was a beat or a miss.
As the FT notes, the ongoing decline in revenue is further confirmation that Deutsche is falling behind its large US rivals which on average reported an 11% increase in the metric. Overall income income from its remaining businesses fell 4% from a year ago as all but one unit suffered declines.
At the group level, a 15% fall in revenue and restructuring costs led to a second consecutive net loss of €832MM in the quarter.
While the core bank generated €352MM in pre-tax profit, Deutsche’s bad bank, which is home to the group’s unwanted assets, sustained a €1bn loss before tax. What is even more bizarre, the "bad bank" posted negative revenue of €223 million in the quarter.
It wasn't all bad: among the bright spots was the corporate bank, which sells risk management and trade finance products to large companies. The unit saw revenue increase 6% in the quarter. The business of advising companies on deals and raising capital reported a 20% jump. The DWS asset management unit attracted 6.2 billion euros ($6.9 billion) in new money, the third straight quarter of net inflows.
Commenting on the results, JPMorgan analysts Kian Abouhossein and Amit Ranjan said that "negative revenue in non-core could lead to material EPS cuts" and pointed out point that IB, corporate bank and AM outperformed, while the private bank disappointed; they also said the most important questions are around the Capital Release Unit, or CRU, as it has negative revenue while bank had previously said it was generating revenue.
Trying to spark some optimism about its results, the bank said its asset disposals were on track. It also reconfirmed its cost-cutting target for the full year. CEO Christian Sewing stressed in a statement that all four core business units were profitable “despite having launched the most comprehensive restructuring of our bank in two decades”.
That, however, was hardly comforting to DB's (former) employees: for the first time since the acquisition of German retail bank Postbank a decade ago, the FT pointed out that the number of employees has fallen slightly below the symbolic threshold of 90,000.
Deutsche Bank shares fell tumbled as much as 7.1%, the biggest drop since July, as the results underscored the uphill battle it is fighting as CEO Sewing seeks to reverse years of revenue contraction and low profitability. Meanwhile, negative interest rates and a slowing economy have blindsided the CEO, while the investment bank is struggling to regain market share in debt trading after years of piecemeal cutbacks.