Deutsche Bank shrinks for eight quarters, meaning more cost cuts

Frankfurt— Deutsche Bank shrank for an eighth straight quarter in the final months of last year, leaving CEO Christian Sewing to pledge yet more cost cuts as he seeks to persuade investors his turnaround plan can produce sustainable profits.

In a period that was overshadowed by market gyrations and images of police raiding the bank’s headquarters in November, revenue fell 2.4%, led by a slump in the key fixed-income trading business that did worse than peers. Sewing said the bank would return to “controlled” growth, a promise that eluded his predecessor, and said if revenue keeps disappointing, he’ll find more savings.

“Management has delivered on what is in their control in the medium term: cost, capital and liability optimisation,” JPMorgan Chase analysts Kian Abouhossein and Amit Ranjan wrote in a note. “However, for now, we remain concerned about Deutsche Bank’s inability to turn around” fixed-income trading.

The prolonged revenue contraction is adding pressure on the CEO and chair Paul Achleitner to explore alternative fixes for Germany’s largest lender. Sewing, who only took over last year, has pleaded for patience with his strategy of expense controls and a scaled-back investment bank, but government is worried he may not succeed before the next economic slowdown.

Top executives believe they may not be able to avoid a radical solution such as a government-brokered merger with Commerzbank unless they can show improvement this quarter, people familiar with their thinking have told Bloomberg.

“We feel we are in control of our destiny, we’re executing against our plans,” James von Moltke, Deutsche Bank’s CFO, said in an interview on Bloomberg TV. Still, “there’s a lot of talk in the sector overall, that over time mergers, consolidation in the European banking sector would be sensible for a variety of reasons. We’ve tended to agree with that.”

Sewing’s targets

Deutsche Bank fell 2.1% at 9.05am in Frankfurt trading. That extended a 4% decline on Thursday after Bloomberg reported that a deal with Commerzbank may happen as early as mid-year. The stock lost more than half its value last year.

Sewing delivered on a pledge to post the first annual profit in four years, with Deutsche Bank reporting net income after minority interests of €267m for 2018, despite a bigger-than-expected loss in the final three months. The bank also achieved a target of keeping costs, adjusted for one-time items, to below €23bn.

“If the revenue environment does not develop as we expect, we will seek additional savings,” Sewing said. “Beyond 2019, we are still committed to further reducing our costs and improving our cost-income ratio.”

Sewing stepped up his target for adjusted costs, promising to keep them below €21.8bn this year, compared with the €22bn previously announced, and affirmed a plan to return at least 4% on tangible equity “despite a challenging market environment”.

But the key securities unit kept losing market share, particularly in fixed-income trading, where revenue slumped 23%, but also in equities, which declined 0.8%. The lender’s US peers, on average, reported a 17% drop in fixed-income trading and 4% higher equities revenue, according to Bloomberg Intelligence.

Von Moltke said that the raid “absolutely impacted” business in December. A group of about 170 law-enforcement officials searched the bank’s headquarters and other offices in late November, in a case tied to the Panama Papers, fueling market concern about potential legal fines. Sewing said at the time the bank had considered the case closed, having examined it in 2016, when news about the Panama Papers first broke.

Client confidence

“Clearly being in the headlines in that way is unhelpful for client confidence,” von Moltke said. “We’ve gone some way to restoring that. There’s more work to do to communicate the nature of these issues.”

Germany’s largest bank has been facing declining revenue for four years, turning the shrinkage — especially in the investment banking division — into the top concern among investors and analysts alike and sparking speculation it may ultimately seek a merger with Commerzbank.

While a deal is viewed by some as an imperfect solution, the German government — which, on Wednesday, slashed its economic growth forecast for this year — has said it wants strong international banks to support Germany’s export-oriented companies. The country still owns a large stake in Commerzbank after a bailout. It doesn’t own a stake in Deutsche Bank.

Billionaire Stephen Feinberg’s Cerberus Capital Management, which owns large stakes in both lenders, wouldn’t stand in the way of a deal, people familiar with the matter have said. Qatar, already a large Deutsche Bank shareholder through two investment vehicles, has committed to increase its stake through the country’s sovereign wealth fund, Bloomberg reported this week.

Bloomberg