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Deutsche Bank rebound hinges more than ever on trading unit

Source: APPremium
Source: AP

  • The bank last year unveiled its biggest restructuring in two decades, exiting equities trading and trimming the larger fixed-income operation
  • So far in 2020, the investment bank made 7.4 billion euros in revenue, more than in all of 2019 and equal to about 40% of total revenue

Five quarters into a historic restructuring of Deutsche Bank AG that aimed to emphasize lending and reduce reliance on trading, Chief Executive Officer Christian Sewing is more dependent on the securities unit than he has ever been.

Germany’s largest lender on Wednesday reported a 47% jump in debt trading, beating all but one of the large investment banks so far and prompting Sewing to lift the outlook. The boost propelled the firm to an unexpected third-quarter profit, even as the corporate bank around which the CEO built his strategy continued to shrink amid negative interest rates and the worsening pandemic.

The performance suggests Deutsche Bank, which still has one of the largest fixed-income desks in Europe, was able to claw back some market share in a key business that had been damaged by years of piecemeal cuts. But with debt trading now a bigger revenue contributor than when Anshu Jain ran the lender, some analysts questioned how sustainable the turnaround is once markets normalize.

“Deutsche Bank’s trading performance has been positive but the outlook for the bank is uncertain for as long as the economic impact of the pandemic remains unpredictable," said Sonja Forster, an analyst at the credit rating provider DBRS.

Deutsche Bank set aside 273 million euros for bad loans in the quarter, slightly less than a previous guidance of 300 million euros. The lender in previous quarters provisioned less than many competitors for the pandemic, citing the quality of its loan book and its exposure to Germany, which has released enormous government aid to support its economy.

Shares of Deutsche Bank swung between gains and losses, dropping as much as 5.1% in early Frankfurt trading before rebounding to rise as much as 3.2%. They were down 0.9% at 4:25 p.m. amid a broad-based market selloff.

The debt trading result compares with gains of about 25% for the biggest Wall Street banks. Only Goldman Sachs Group Inc. did better, with a 49% increase. Sewing said earlier this year that trading would slow in second half, but some of those predictions haven’t come to pass.

“We not only demonstrated continued cost discipline, but also our ability to gain market share," he said in a statement Wednesday. The securities unit continues to perform well so that revenue there will be “significantly higher" for the full year, the lender said, raising a previous guidance that called only for higher revenue at the business.

So far this year, growth in debt trading had trailed the competition even as it benefited from the rally, though the third quarter snapped that streak. Sewing, who also heads the investment bank, has said the division is only partly driven by the buoyant market and partly as a result of changes made under his leadership.

Key figures from Deutsche Bank’s third quarter

It’s “a good set of results," Citigroup Inc. analysts including Andrew Coombs wrote in a note. Still, the investment banking “industry backdrop is unlikely to be as supportive for Deutsche Bank in 2021."

The bank last year unveiled its biggest restructuring in two decades, exiting equities trading and trimming the larger fixed-income operation. Sewing, a former corporate banker, had initially planned more aggressive cuts to trading but pinned his hopes on the business when it became clear that negative interest rates would weigh on the bank’s other operations for longer.

So far in 2020, the investment bank made 7.4 billion euros in revenue, more than in all of 2019 and equal to about 40% of total revenue. In 2018, the year Sewing took over, its share was 30%. The corporate bank, which Sewing broke out as a separate business as part of his revamp, made 3.9 billion euros so far this year, about 1% less than in the same period last year.

Debt trading is now a bigger contributor to overall revenue than at any time since at least 2012, when former investment bank head Anshu Jain took over as co-CEO. Some of that increased reliance reflects revenue losses in other parts of the bank.

Debt trading “has continued a moderation in October but the environment is still supportive," James von Moltke, Deutsche Bank’s chief financial officer, said in an interview. “In the other businesses we are expecting stable conditions in the fourth quarter relative to the third."

Markets have rewarded the trading rebound, making the shares the best performer among the main European lenders this year. That also reflects the fact that other banks were hit hard by a de-facto ban in Europe on dividend payments, whereas Deutsche Bank hadn’t planned a payout while it’s going through the restructuring.

The shares are still down more than 90% from their peak in 2007, and trade at about a third the value of the assets on the bank’s books.

What Bloomberg Intelligence Says:

There’s greater confidence in Deutsche Bank’s restructured franchise, we believe, following FICC trading revenue gaining an adjusted 43% year-over-year, along with a 15% growth in origination and advisory fees that outpaced consensus. There was also progress in capital, costs and more-modest noncore asset reductions. A 49% surge in FICC trading revenue (dollar terms) matches Goldman Sachs’ leading increase, exceeding the aggregate 25% jump for U.S. peers.

Deutsche’s FICC Blowout, Fee-Gain Boost Needed Momentum: React

Alison Williams, financials analyst

The quality of the bank’s loan book may be tested over the coming months as Chancellor Angela Merkel is pushing for tougher curbs on movement and contact, including closing bars, restaurants and leisure facilities, according to a draft federal government briefing paper obtained by Bloomberg. The paper will form the basis for discussions with regional premiers later on Wednesday, before Merkel holds a news conference to announce the measures agreed.

Lenders including UBS Group AG, Banco Santander SA and HSBC Holdings Plc have signaled they’re ready to resume dividends or share buybacks once regulators lift restrictions. Their optimism contrasts with warnings by European governments that renewed lockdowns could become inevitable if they can’t stem the rise in infections. European banking regulators, who had been moving closer to lifting a de-facto dividend ban, are increasingly worried about the worsening economic outlook.

This story has been published from a wire agency feed without modifications to the text.

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