Frankfurt The war in Ukraine may have hit the share prices of Deutsche Bank and other European banks, but it has no impact on the goals of Germany’s largest financial institution: CEO Christian Sewing promises shareholders a return of more than ten percent by 2025 and dividends of eight Billion euro.
So far, the bank had only promised its shareholders that it would use five billion euros in dividends and share buybacks from 2022. After a decade of crisis and three years of hard restructuring, Sewing wants to bring the institute back to normal. “With our evolved strategy, we are now shifting towards sustained growth and higher capital returns to our shareholders,” he said.
From the point of view of analysts, this is necessary because many of the bank’s European competitors have left crisis mode and are attracting investors with higher dividends and share buybacks. The major Italian bank Unicredit, for example, announced in December that it intends to pay out 16 billion euros to its shareholders in the form of buybacks and dividends over the next few years.
However, the major uncertainty factor for the financial sector is the Ukraine war with its consequences for world trade and growth in Europe and the world. In a statement, the bank acknowledged that the “current geopolitical and macroeconomic environment” creates uncertainties “whose consequences cannot yet be fully assessed”. “However, our involvement in Russia is limited and we have the risks under control,” emphasized CFO James von Moltke.
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Despite the geopolitical turmoil, the bank’s business results in January and February were better than in the previous year in terms of key indicators such as returns and the cost/income ratio. Despite the war in Eastern Europe, the bank is therefore sticking to its goals for this year: “For 2022 as a whole, we continue to expect an after-tax return on tangible equity of eight percent,” said CFO von Moltke. The bank wants to achieve this through higher income and further cost reductions.
The Ukraine crisis endangers the restructuring successes of the CEO of the largest domestic financial institution.
(Photo: dpa)
A combination of these two factors should also ensure higher profitability in the future: In addition to an after-tax return on tangible equity of more than ten percent, the bank is aiming for a cost/income ratio of less than 62.5 percent. For every euro that the bank earns, it does not want to spend more than 62.5 cents. Yields are expected to grow by 3.5 to 4.5 percent annually.
Analysts and investors had expected the bank to set itself more ambitious goals at its investor day. The research house Autonomous had even expected a return target of twelve percent – albeit in the period before the Ukraine war. Andreas Thomae, fund manager at Deka Investment, thought nine percent was realistic.
But all forecasts are subject to how the situation in the Eastern European crisis region develops: Deutsche Bank is one of the institutions that have so far suffered particularly badly from the economic consequences of the war. In the past four weeks, the price has collapsed by more than a third. For comparison: the industry index Stoxx Europe 600 Banks lost only 25 percent in the same period.
The exposure to Russia itself is manageable: the bank estimates its net credit exposure related to Russia at the end of 2021 after taking into account guarantees and collateral at 0.6 billion euros. The net commitment in Ukraine is 42 million euros. In addition, the money house emphasized in a statement on Wednesday evening that most of its derivative positions related to Russia had now been settled.
Energy prices could become a problem for Deutsche Bank
However, investors are no longer just worried about direct involvement in the crisis region. The rapid rise in energy prices is stoking fears of a global recession, which could lead to higher bank defaults. Disruptions in global trade are also bad news for Deutsche Bank, which is heavily involved in trade finance.
In addition, shareholders fear that the poorer economic prospects will shift the interest rate turnaround in the euro zone that the financial institutions have been hoping for for a long time. At the beginning of the year, it was above all the hope of a normalization of monetary policy that made banks the best sector in the Stoxx Europe 600 stock market index; meanwhile, no sector is doing worse.
The crisis on the stock exchange only hit banks with large Russian subsidiaries such as the French Société Générale and the Italian Unicredit, whose shares collapsed by more than 40 percent, even harder than the Frankfurt. The Austrian Raiffeisenbank International (RBI) is considered to be the institution with the greatest Russia risk because around 40 percent of its profits come from Russia and Ukraine. The price losses of the RBI add up to 57 percent in the past four weeks.
More: “Times are getting much worse” – Europe’s banks fear expropriations in Russia