Frankfurt — Deutsche Bank reported the biggest gain in fixed-income trading in almost eight years as a market rally bolstered CEO Christian Sewing’s turnaround efforts for a third straight quarter.
Income from buying and selling debt securities rose 39% from a year earlier, offsetting weaker revenue in asset and wealth management, the lender said on Wednesday. While its traders could not quite keep up with the five biggest Wall Street banks, which roughly doubled fixed-income revenue, their gain was the biggest since the third quarter of 2012. Revenue from advising on stock and bond sales as well as mergers increased 73%.
The investment bank and particularly the trading business, for years the target of cutbacks, have provided some much-needed support for Sewing in 2020 as he contends with the prospect of surging bad loans while negative interest rates weigh on the corporate bank that’s a key pillar of his strategy. The CEO said that his overhaul of Germany’s largest lender, which he unveiled a year ago, was on track or ahead of plan, while cautioning that the trading environment will probably be less supportive in the second half of the year.
“We do expect a normalisation” in the trading environment, CFO James von Moltke said in an interview with Bloomberg TV. “The investment bank outperformance in the first half has essentially financed the corona-related impact” on earnings.
Even with the expected slowdown, the bank lifted its revenue outlook for the full year slightly, predicting that the top line will be “essentially flat” rather than down.
Across Wall Street, the market gyrations in the wake of the pandemic have fuelled record investment banking results, with the five biggest US firms disclosing $45bn in revenue from their trading and deal making units in the second quarter.
In the UK, Barclays on Wednesday reported a 60% gain in fixed-income trading, a bright spot as the lender took a £1.6bn charge to anticipate bad loans from the crisis. Spain’s Banco Santander took an €11bn hit from the Covid-19 pandemic, mainly writedowns on past acquisitions, the biggest blow yet to a European bank. Unlike Barclays and Deutsche Bank, Santander has no large trading business to offset virus-related charges.
Deutsche Bank rose 2.9% in Frankfurt trading. The support from the trading boom helped fuel a 19% rally in the shares this year, the best performance of the large European banks.
Other Deutsche Bank units have struggled as negative interest rates erode income from lending while market volatility hurts asset and fees for overseeing them. Both asset management unit and retail banking saw lower revenue in the second quarter. On the positive side, the bank saw inflows of €8.7bn at its DWS asset manager in the quarter, better than analysts had estimated.
Core bank revenue, which includes only the businesses Deutsche Bank is keeping in its overhaul, rose 6%, driven by the investment bank. The transaction bank — a centrepiece of Sewing’s effort to wean the lender off its reliance on trading — saw a 4% increase, reflecting higher credit loss recoveries and a portfolio rebalancing.
“Deutsche Bank’s stabilising revenue, with accelerating growth in its core transaction banking, trading and underwriting business — along with operating leverage — may give a needed credibility boost to its strategic plan,” Bloomberg Intelligence analysts led by Alison Williams wrote in a note. “The market environment has helped, but management is keeping costs aligned with its targets.”
The bank set aside €761m for bad loans, roughly in line with a guidance of about €800m it had given in June. Borrowers who had drawn down credit facilities during the early days of the pandemic have already started to pay them back or refinance, boosting the bank’s main measure of capital strength — the common equity Tier 1 ratio — to about 13.3% at the end of June from 12.8% three months earlier, Deutsche Bank said last week.
Unlike its Wall Street rivals and some European peers, Deutsche Bank has set aside relatively small amounts for bad loans, which are expected to surge in the wake of the pandemic. Sewing has argued that his lending standards are high and the firm is less exposed to some of the worst-hit borrowers. He’s also being helped by some of the world’s most extensive government loan guarantee programmes set up to combat the economic fallout from the pandemic.
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