Silver as an investment

Deutsche Bank Trading Revenue Plunges 30% As CEO’s Time Running Out

Deutsche Bank’s Q3 2017 revenues were €6.78 billion, below market expectations of €6.88 billion. The share price fell 2.7% shortly after the European market open. The problem – like the previous quarter – was a bigger-than-expected drop in trading revenues. Trading revenue was down 30% year-on-year to €1.512 billion versus €2.162 billion in Q2 2017.

The challenge for the embattled CEO, John Cryan, is that the trend is still deteriorating. Trading revenues in Q2 2017 fell 18% year-on-year to 1.666 billion euros versus 2.027 billion euros. Earlier this year, Cryan pledged to turnaround the performance of the investment bank as soon as this year. On a more positive note, earnings – which obviously possess a near-term degree of flexibility in the banking sector – beat expectations. This mirrored Q2 2017, as Cryan continued to apply a knife to the cost base (although end Q3 headcount rose “slightly” versus end Q2 – probably compliance).

The countdown to Cryan's replacement is ticking every louder: “These aren’t the kind of numbers you want to keep seeing,” said Markus Riesselmann, an analyst at Independent Research in Frankfurt (who has a buy reco on the bank). “The longer this goes on, the harder it gets to believe management’s hopes for a recovery. We cannot see another two or three quarters like this.”

As Bloomberg reported, Deutsche Bank AG reported a bigger-than-expected drop in third-quarter trading revenue as Europe’s largest investment bank keeps losing ground to rivals. Trading declined 30 percent from a year earlier, Frankfurt-based Deutsche Bank said Thursday in a statement. That’s worse than the 15 percent average decline at the five biggest U.S. investment banks and the 24 percent drop expected by analysts. Net income more than doubled to 647 million euros ($766 million), beating the 278.6 million-euro average estimate of seven analysts, as the bank cut costs.

Cryan is pleading for patience as he battles to turnaround Europe’s largest investment bank, a pricess which will take years. He only has “the next few quarters” as Bloomberg explains.

“We are convinced that the benefits of our efforts will step by step become more apparent in the coming quarters and years,” Chief Executive Officer John Cryan said in the statement. Revenue was hurt by a “challenging” trading environment, he said. Cryan, 56, has come under pressure from investors as he struggles to deliver on a pledge made in March, when he unveiled the bank’s third strategy in as many years, to return to “controlled” growth. While he settled legacy misconduct cases, reduced risk in the securities unit and raised fresh capital, the bank hasn’t won back all clients who reduced business last year. That’s made an industrywide slump in trading worse for Germany’s largest lender. Deutsche Bank’s shares lost 5.6 percent this year through Wednesday, the sixth-worst performance among the 44 members of the Bloomberg Europe 500 Banks and Financial Services Index. Three of the 10 largest stakeholders in the bank, speaking earlier this month on condition of anonymity, said they want to see a turnaround in the next few quarters, particularly in the trading business, to continue to back Cryan. Revenue has fallen in all but two quarters since he took over in 2015.

Deutsche’s board had this to say about market conditions and key performance drivers in the earnings release.

Revenues were negatively impacted by a market and interest rate environment which remained challenging… Client activity was subdued compared to a strong prior year quarter, while volatility and interest rates remained low.    Cost reductions boosted profit growth. Noninterest expenses were EUR 5.7 billion in the quarter, down by 14%, or 11% if adjusted for exchange rate movements. Restructuring and severance expenses were significantly lower, as were litigation charges, despite the bank successfully resolving a number of litigation matters, largely within existing provisions. Adjusted costs were down 6%, or 3% if adjusted for exchange rate movements, largely reflecting the absence of the NonCore Operating Unit that was closed last year, and lower professional services fees. Accruals for current-year variable compensation were higher year-on-year. Total headcount fell approximately 4,000* year-on-year. credit quality remained high. Provision for credit losses was EUR 184 million, down by 44% versus the prior year quarter, reflecting a broad-based improvement in the Corporate & Investment Bank and continued strong credit quality in the Private & Commercial Bank.

And on the Corporate & Investment Bank (CIB).

Revenues were EUR 3.5 billion, down 23%, or 21% adjusted for exchange rate movements, reflecting muted client activity and low volatility versus the prior year quarter which saw high levels of client activity post-Brexit. Fixed Income & Currencies (FIC) revenues were down 36%; if reported on the basis of previous segmental reporting, including the relevant revenues now reported in the Financing segment, the year-on-year decline in FIC would have been 24%. Revenues in Equity Sales & Trading and in Origination and Advisory were lower year-on-year, while revenues in Global Transaction Banking (GTB) were lower year-on-year but stable versus the second quarter. GTB’s year-on-year revenue development partly reflected strategic reductions in the business perimeter. CIB has made substantial progress in the repositioning announced earlier in 2017.

So Deutsche Bank and its CEO are as mired in the dismal performance of the investment bank as they were last quarter, probably more so.

In a Bloomberg TV interview this morning, CFO James von Moltke, defended the company’s performance.

  • “We’ve actually been holding share, especially in fixed-income markets”
  • “It’s been a difficult market for everyone”
  • Highlights advisory and prime finance as areas where there is time lag in investment banking revenue
  • Says Deutsche Bank gained market share in EMEA investment banking, rates derivatives
  • Expects partial IPO of asset management unit “well within” timeline of within 24 months after announcement in March 2017
  • Co. making “significant progress” in preparing unit for IPO
  • “Too early to take a view” on potential outcome of Basel negotiations

Below is some of the feedback from analysts speaking to Bloomberg after the results:

“The question of investment banking revenue weakness won’t go away,” said Ingo Frommen, an analyst at Landesbank Baden-Wuerttemberg who has a hold recommendation on the shares. “The trading results were very negative and they won’t silence the discussion about how management can get a handle on this issue.” Deutsche Bank’s "poor" set of figures from revenue to capital ratios in 3Q will drive share price down, Natixis analysts led by Alex Koagne write in a note. Natixis analysts say profit beat mainly comes from lower-than- expected provisions for litigation and restructuring costs. Maintain reduce rating, as no sign of how the group could improve profitability. DB continues to lose market share in CIB, a key profit contributor. Morgan Stanley analysts led by Magdalena Stoklosa write that weak FICC (-36% YoY) likely to drive first stock reaction: Maintain equal weight, PT EU16 On divisional level, CIB the miss, AM weak, PCB stronger.