One of these quarters Deutsche Bank is finally going to report a quarter that is not a disaster... just not today.
This morning, Germany's biggest bank reported its first earnings under its new CEO, Christian Sewing, which missed across the board: Q1 net revenue missed the lowest analyst estimate, coming at €6.98 billion, down 5% and below the estimate €7.27 billion, also missing the low end of the range (€7.12 billion to €7.33 billion), and unlike other banks where at least the rebound in equity trading helped offset stagnant FICC, that was not the case for DB where sales and trading crashed by 17% to €2.45 billion - compared with a an average 10% increase at the big 5 US banks - resulting in a 74% collapse in pre-tax income for the corporate investment bank.
Summing it up, Deutsche’s pre-tax income more than halved to €432MM from a year prior, missing average analyst expectations by almost a third, and resulting in a paltry €120 million in after tax profits, a 79% plunge Y/Y.
Christian Sewing, DB's new CEO, who unceremoniously replaced John Cryan one month ago, did not mince his words when slamming the abysmal results: "We are on a good track both in the DWS asset management business and in our Private & Commercial Bank, although we need to substantially improve profitability in both. Our Corporate & Investment Bank is also doing well in some areas and held or gained market share in certain areas. However, we are not strong enough in other areas of this business. Therefore we have to act decisively and to adjust our strategy. There is no time to lose as the current returns for our shareholders are not acceptable.”
That was just the beginning, however, and as was rumored previously, the bank announced a sweeping restructuring plan, abandoning ambitions to be a top global securities firm, scaling back U.S. rates sales and trading, reducing the corporate finance business in the U.S. and Asia, and reviewing its global equities business with a view toward cutting it back, the bank said in a statement. The measures will lead to a “significant reduction” in the 97,130-person workforce this year, Deutsche Bank said. Read: massive layoffs.
Putting DB's collapse in context, just minutes later, UK's Barclays, Deutsche's biggest European peer, beat trading expectations for a second straight quarter, with revenue from markets rising 8 percent. Deutsche Bank stock tumbled as much as 4.2% before reversing losses and trading unchanged. The stock remains among the worst performers among European banks over the past years, and are trading 87% below its 2007 high.
While the action had been hinted previously, the announcement came as a bit of a shock to what was once a bank with ambitions to overtake both JPM and Goldman as a dominant name in the global arena.
The bank confirmed that it would exit from its investment banking activities where it lacked a “sustainable competitive advantage”, although it did not disclose the number of job cuts it was planning. Sewing said he wanted to lower the share in CIB revenue to 50 per cent by 2021, down from about 54 per cent in 2017.
As Bloomberg notes, the future of the investment bank had been a key factor in the tumultuous management shakeup that saw Christian Sewing take over John Cryan as chief executive officer this month. A Deutsche Bank veteran who started as an apprentice, Sewing is accelerating a push to refocus the lender on its European home market and reverse a two-decade effort to compete head-to-head with the large Wall Street firms that dominate volatile securities trading.
While shrinking the investment bank will make it harder for Sewing to return Deutsche Bank to growth, it could help him reach a target of 23 billion euros ($28 billion) in adjusted costs this year. Sewing has called the target “non-negotiable” in a memo to staff sent earlier in April. Deutsche Bank confirmed that target on Thursday, when it increased its estimate for restructuring expenses to 800 million euros this year, up from an earlier estimate of 500 million euros, Chief Financial Officer James von Moltke said.
The CFO told analysts that as most of the job cuts would happen outside Germany, where labour laws are rigid, they could be implemented quickly. "We are aiming to execute them in 2018,” said Mr von Moltke. He added the additional cuts in investment banking would come with €300m in further costs in 2018.
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While analysts welcomed the massive overhaul, they pointed out that the lack of detail made it difficult to assess its real significance: the investment bank shift “appears to have some logic,” Andrew Coombs, an analyst at Citigroup Inc., wrote in a note to clients. “But we fear these steps could also have unintended consequences” for the rest of the business and “put even further pressure on both the capital position and earnings” in the short term.
Others chimed in: “we applaud [Mr] Sewing for getting full management support for a ‘shrinkage’ plan so quickly. What we are missing is timeframe and details,” wrote JPMorgan analyst Kian Abouhossein in a note to clients. Abouhossein previously urged Deutsche Bank to cut back it’s investment banking operations in the U.S., saying they’re not profitable enough. “We believe it is the right strategy especially taking into account the poor results” he added. UBS analyst Daniele Brupbacher pointed out that “it is unclear whether this is a radical change”. In calls with analysts and journalists, Sewing stressed that the cuts did not imply the investment bank was fully retreating from the US, although it was unclear what if any operations will remain.
Meanwhile, as it evacuates the US, Deutsche Bank said that it wants to focus its corporate finance business on industries that align with its European clients or areas where it has a leadership position. In U.S. rates sales and trading, it plans to shrink the balance sheet, leverage exposure and repo financing. In global equities, it wants to reduce leverage exposure to prime finance, focusing on the deepest relationships. As a reminder, Deutsche Bank has one of the largest derivative exposures on its balance sheet, at just under €50 trillion at the end of 2017.
Deutsche also said that it plans to focus its consumer bank on growing markets like Italy and Spain while in wealth management, the bank will look to grow in Germany and in international markets.
As Bloomberg adds, Thursday’s announcement marks a retreat from decades during which Germany’s largest lender sought to take on the largest Wall Street banks.
It joined the ranks of global securities firms with the 1989 purchase of British merchant bank Morgan Grenfell and a decade later purchased Bankers Trust, a New York derivatives house. That deal was a major step in the company’s transformation because it expanded access to the world’s biggest capital markets. Paul Achleitner, now Deutsche Bank’s supervisory board chairman, advised it on the purchase while at Goldman Sachs Group Inc.
The aggressive expansion crashed with a bang and led to a spate of legal and market manipulation scandals that took former CEO Cryan a good part of his three-year tenure to clean up. Deutsche Bank spent more than $17 billion paying fines and settling litigation since the start of 2008.