Germany’s largest lender is braced for a drop in revenue and a jump in loan provisions.
Deutsche Bank warned that the coronavirus pandemic could threaten its ambition to return to profitability this year, as Germany’s largest lender braced itself for a painful drop in earnings and a jump in loan provisions.
Despite a surge in revenue at the investment bank during the first quarter, Deutsche posted a net loss attributable to shareholders of €43m during the period, compared with a profit of €97m last year, the Frankfurt-based lender said on Wednesday.
This reflected the bank’s move to more than triple reserves for bad loans, partly due to the fallout from coronavirus.
While chief financial officer James von Moltke cautioned that it was too early to update the full-year profit guidance, he said that Deutsche’s ambition to break even in 2020, on a pre-tax level, would now be more difficult to achieve. He added that the lender was sticking to its target of trimming costs by €2bn this year, to €19.5bn.
If, as analysts expect, the bank’s nascent recovery is derailed and it fails to return to profit, it will mark its sixth consecutive annual loss.
First-quarter net revenue came in almost exactly the same as the previous year, at €6.4bn, as gains at the investment bank offset a decline at the corporate bank.
Andrew Coombs, an analyst at Citigroup, said the cost-cutting target was “unrealistic” as it would be “difficult to execute on strategic plans in the current environment”. Deutsche Bank, which is in the middle of a restructuring programme to cut 18,000 jobs, has already suspended further job cuts during the coronavirus pandemic.
At the closely watched investment bank, loan-loss provisions shot up 35 times year on year, mostly driven by the economic fallout from the pandemic. Still, Kian Abouhossein, an analyst at JPMorgan, warned that provisions related to Covid-19 appeared low compared with peers.
On Wednesday, Barclays set aside £2.1bn to cover potential loan losses, versus just €506m at the German lender. At HSBC, loan provisions jumped 417 per cent to $3bn and it warned that figure could rise to $11bn by the end of the year in a worst-case scenario.
On Sunday Deutsche released parts of its first-quarter earnings early because they exceeded analysts’ expectations. It temporarily suspended its minimum target for common equity tier one — a key measure of its financial strength — of 12.5 per cent.
Shares in the German lender, which surged more than 10 per cent on Monday after the pre-release, rose another 4 per cent to €6.65 on Wednesday, reaching the highest level since early March. Still, the shares remain near the record low of €4.87 hit earlier this year.
While the lender’s corporate bank and its retail business in Germany largely flatlined, the performance was mainly driven by its investment bank, which in the past suffered from falling revenues and high costs.
In the first quarter, a surge in trading lifted the unit’s revenue by 18 per cent while costs fell by 15 per cent, resulting in the highest quarterly pre-tax profit for the investment bank in three years.
The division’s return on tangible shareholder equity more than doubled to 7.7 per cent, in line with the bank’s 2022 target. The investment bank’s results “were strong”, said JPMorgan’s Mr Abouhossein.
Ram Nayak, head of fixed income sales and trading at Deutsche, told the Financial Times that the coronavirus pandemic did not massively distort the unit’s performance.
“We benefited from the increased client activity in rates, foreign exchange and emerging markets debt trading, but at the same time we faced [offsetting] headwinds in parts of our credit business,” he said.
For the full year, the bank still expected a slight year-on-year rise in fixed income trading revenue, said Mr Nayak.
Fees from debt origination were 26 per cent higher than a year ago. “We saw a record issuance of investment-grade debt,” said Mark Fedorcik, head of Deutsche’s investment bank, adding that he expected this trend to continue in the short to medium term.