“These are extremely poor results,” Citi’s Andrew Coombs wrote last week after Deutsche Bank CEO John Cryan announced a “sobering” set of numbers for 2015.
By “sobering,” Cryan meant a net loss of more than $7 billion. It was the first annual loss since the crisis and was capped off by a Q4 loss of €2.1 billion which included €1.2 billion in litigation fees.
Revenues missed estimates by 11% and fell 16% Y/Y but that in and of itself “fails to explain €0.7bn of the underlying miss,” Citi’s Coombs continued.”It would appear that the bank has also been forced to book elevated credit losses during the quarter.”
Citi is also looking for some €3.6 billion in additional litigation charges this year.
On Thursday we got a look at the full results for Q4 and the picture is, well, quite ugly.
Investment banking was a nightmare, as revenues plunged 30% in corporate banking and securities where provisions for credit losses jumped from just $9 million in Q4 2014 to $115 million. For the year, provisions rose to $265 million versus $103 million for 2014. Deutsche blamed “valuation adjustments in Debt Sales & Trading, a challenging trading environment, and lower client activity” for the decline in revenues. Fixed income and equities revenue fell 16% and 28% during the period, respectively.
"Another pressing question is if the Deutsche investment bank model is in structural decline," Citi's Coombs wrote today, after parsing the results. "FICC was down -8% yoy in 4Q15 (vs US peers +4% yoy) [and while] management argues there is no structural deterioration, this remains to be seen."
BofAML's Richard Thomas called the trading numbers "horrible" and the overall results "grim." "We think that the bank is in for another difficult year in that guidance is that ‘2016 peak restructuring year’," Thomas said, adding that "it looks like revenues are under a lot of pressure, yet adjusted costs are guided to be flat with another €1bn of restructuring costs."
“In fairness to John Cryan, he signaled that re-orientating the investment bank will have a revenue impact so we shouldn’t be too surprised about that,” Neil Smith, an analyst at Bankhaus Lampe with a buy recommendation on the stock told Bloomberg.
For his part, John Cryan is sorry both for the performance and for himself because as it turns out, he won't be getting a bonus and neither will the rest of the firm's top management.
“It would be inappropriate vis-à-vis society to post €5.2bn in legal provisions in one year and not reflect that in compensation, particularly when the share price has fallen, and shareholders have suffered,” he said, explaining why members of the management team will not receive bonuses for 2015. “By and large, I think we are underpaying against our international peer group this year and I hope that many staff understand why.”
We're sure they understand why. The results are terrible. How long the staff will stay if they aren't getting paid is another matter entirely.
“Although no one wants to contribute to leading a company when the cost of joining the management board is a diminution in possible compensation, in the context of the overall performance of the bank last year . . . that’s a decision which I respect,” Cryan added.
Deutsche said litigation costs would be "less than 2015," which isn't saying much given that the bank shelled out some €5.2 billion last year paying for the shenanigans of years past.
As for whether the bank will ultimately have to raise capital, Citi says that's a distinct possibility. Here's why:
We view the leverage ratio as the binding capital constraint for Deutsche. The current 3.5% is well below peers and the company’s own 4.5% target. Post restructuring & litigation charges and a Postbank divestment at 0.6x P/TB, we estimate a pro-forma leverage ratio of c3.3%. This implies a c€15bn shortfall, of which we expect part to be met by underlying retained earnings and part via AT1 issuance. However this still leaves an equity shortfall – we see a c4% leverage ratio by end-2017 – which is likely to necessitate a capital increase of up to €7bn in our view. In addition we note the target CET1 ratio of >12.5% only allows for a 0.25% management buffer above the fully-loaded SREP requirement. This provides the company with limited flexibility especially if BaFin were to introduce a counter-cyclical buffer (max 2.5% add-on).
So as it turns out, it's much harder to turn a profit when you stop cheating as much and when you are forced to fork over billions for all of the cheating you used to do.
It certainly looks as though Cryan's bid to overhaul the investment banking side may be far too little far too late, so don't be surprised to see the equity trading in the single digits by year end.
Oh, and about that dividend; Cryan says it's not coming back until 2017 "at the earliest."