Frankfurt In the past quarter, Deutsche Bank generated its fifth quarterly profit in a row. Germany’s largest financial institution earned the bottom line – after deducting interest on subordinated bonds – a profit of 194 million euros, as it announced on Wednesday. That is an increase of seven percent compared to the same period last year and more than the analysts had expected on average. The pre-tax profit even climbed by around 15 percent. Five consecutive quarters in the black is the institute’s longest profit in a long time.
CEO Christian Sewing was correspondingly confident. “We are thus on a very good way to achieve a return on the material equity of eight percent after taxes, which we have set for 2022,” he wrote in a letter to the employees.
In the third quarter, however, the after-tax return was only 1.4 percent. This was also due to the bank’s new cost initiatives, which had led to one-time renovation costs of 583 million euros. However, these expenses should lead to more savings in the coming quarters.
“Overall, we have already shouldered 90 percent of the expected burdens from the transformation and are well on the way to having almost completely digested the renovation costs by the end of the year,” emphasized Sewing.
Top jobs of the day
Find the best jobs now and
be notified by email.
However, the progress made little impression on investors: the bank’s shares lost almost five percent in the morning. Dealers complained, among other things, of the institute’s higher costs. In the past, it was primarily cost discipline that impressed investors. However, the institute recently abandoned its absolute cost target and is now aiming for a cost-income ratio of only 70 percent. The Citigroup analyst also complained that the result was better, mainly because of the lower risk provisioning.
The shares of the bank also performed poorly in a European comparison: Within the Stoxx Europe 600 banks, which fell slightly overall, Deutsche Bank was one of the biggest losers. The discounts were significantly larger than those of the major Spanish bank Santander, which had even been able to increase its net profit by 24 percent to 2.2 billion euros. Santander owed this not only to the lower loan loss provisions but also to the booming business abroad.
Since the beginning of the year, the price of Deutsche Bank shares has risen by 28 percent – the European banking index rose by as much as 39 percent during this period.
After-tax return is expected to increase to eight percent by the end of 2022
In 2019, Deutsche Bank initiated a profound restructuring of the institute, closed entire areas such as share trading and promised significant cost reductions. This should drive the after-tax return to eight percent by the end of 2022.
The rating agencies honor the course of the institute, Moody’s and Fitch have raised their credit ratings for the bank. For Sewing these are “important milestones”.
The fact that profits were higher despite the renovation costs was due to the bank’s higher total income – they rose by two percent to six billion euros – and significantly lower loan loss provisions.
Deutsche Bank once again earned the most money in investment banking. It is true that the pre-tax profit there was EUR 861 million, ten percent lower than in the previous year. With that, the investment bank still fared significantly better than analysts had expected. This was largely due to revenue from advisory business on mergers and acquisitions and growth in debt and equity issuance.
The bank made progress in its stable business areas such as the private and corporate customer segments, which were slowed down for a long time by the low interest rates and later by the corona pandemic. Sewing had promised to increase the importance of stable business areas, but investment banking in particular shone during the corona pandemic.
Corporate customer business fared significantly better than in the previous year
But now the first progress has been made in the other divisions: In particular, the corporate customer business performed significantly better than in the previous year with a pre-tax profit of 292 million euros.
Among other things, the division benefited from the fact that it was able to issue more loans again. The recovery in world trade may have contributed to this – the institute is very active in trade finance. In addition, the bank has meanwhile enforced negative interest rates for many of the high deposits of corporate customers. The declining risk provisioning for loans at risk also supported the results.
The private customer division also earned more money again after losses in the previous year. The institute achieved higher income, especially in business with wealthy customers.
However, there were setbacks in the German private customer business. However, this was also due to the consequences of the ruling by the Federal Court of Justice, which obliged banks to actively obtain approval for price changes from customers. The bank put the charges at 98 million euros. In the fourth quarter, the burdens are expected to be significantly lower.
Even at the fund subsidiary DWS, which is under pressure because of the allegation of greenwashing, business was better than in the previous year. Deutsche Bank was relieved that the greenwashing allegations against the subsidiary DWS have so far not had a negative impact on business.
In the third quarter, the wealth management division recorded net inflows of twelve billion euros, including five billion euros in sustainable investments. “This is the best quarter this year for net inflows into ESG investments – despite the recent disputes,” said CFO James von Moltke.
The DWS – just like the Deutsche Bank – have clear criteria for which assets are classified as sustainable, said von Moltke. The DWS therefore continues to stand by the information that it has given in its annual reports. Since there are not yet any industry-wide sustainability standards, Deutsche Bank has developed its own criteria for what is considered sustainable and what is not. Looking ahead, von Moltke hopes for more standardization across all industries: “This could eliminate speculation, legal risks and uncertainty in the market.”
Little fear of new capital rules
Deutsche Bank says it can live with the implementation of the tougher Basel III capital rules in Europe. “We believe that the effects will be very manageable,” said Moltke’s CFO. Deutsche Bank does not assume that it will have to raise additional capital because of the new rules – for a long time a scary scenario for investors. The institute will, however, examine whether adjustments to the granting of loans are necessary, for example in the pricing of certain financings.
The Basel III rules restrict banks’ ability to reduce their capital requirements using internal models. Especially at large institutions such as Deutsche Bank, which rely heavily on internal models, the so-called risk-weighted assets (RWA), which financial institutions have to back up with equity, are likely to increase. This Wednesday, the EU Commission will present its plans on how the Basel III rules will be implemented in Europe.
With its proposal, the EU Commission has at least partially responded to the feedback from the financial sector and has taken into account the special features of the European financial market, said von Moltke. How strong the RWA increase at Deutsche Bank will be as a result of the Basel reform, he is not yet able to quantify precisely. He assumes, however, that “we will end up at the optimistic end of the assumptions that we have had so far”. This relates to both the RWA increase and the period that banks are given to introduce the new rules.
Despite the progress, Sewing urged the workforce to discipline. “Our shareholders expect us to achieve our target return of eight percent. Let’s not repeat the mistake of yesteryear: that we lose pace when we’re back on track, ”he wrote.
In the spring of next year, the bank plans to give an update on its strategy at an investor’s day.
More: Deutsche Bank will close 200 Postbank branches by the end of 2023.