Deutsche Bank’s Rising Costs Take Shine Off Trading Beat

Deutsche Bank AG Chief Executive Officer Christian Sewing said he’s optimistic the lender can keep increasing revenue through next year, helping offset headwinds from rising costs and deteriorating credit quality.

(Bloomberg) — Deutsche Bank AG Chief Executive Officer Christian Sewing said he’s optimistic the lender can keep increasing revenue through next year, helping offset headwinds from rising costs and deteriorating credit quality.

The lift from rising interest rates “is holding up far stronger than we initially planned,” Sewing said on a conference call Wednesday. “I do believe that with regard to our own existing plan, we see positive surprises also in the second half of 2023, and I do also think in 2024.” 

The comments helped reverse a slump in the shares that was triggered after litigation and investments fueled a bigger-than-expected jump in operating expenses. Revenue and profit beat analysts’ estimates, as as the corporate bank continued to benefit from higher interest rates and fixed-income traders weathered a broad slowdown in the business better than most peers.

Sewing has vowed to increase revenue and profitability as he seeks to lift a share price that remains below the level when he took over as CEO five years ago. But the slowdown in trading, a weakening economy and signs that the lift from higher interest rates may be waning have complicated that challenge and forced him to balance investments with more costs reductions. 

“We must maintain rigid discipline when it comes to our costs,” Sewing said in a message to employees Wednesday. “It is the only way we can create the financial leeway to continue investing in our business and future growth.”

Expenses rose 15% in the second quarter, more than analysts had expected, and costs for the full year are now likely to increase slightly, after the bank previously guided for flat expenses.

In part, the increase stemmed from severance payments after Deutsche Bank in April announced plans to cut about 800 senior back-office staff to lower its running expenses. The other driver was litigation, after the lender agreed to pay a $186 million penalty to settle a US investigation that found it failed to put in place sufficient measures to prevent money laundering. 

While Deutsche Bank struggled with costs, other banks were able to keep a lid on expenses. UniCredit SpA trimmed costs by about 1% in the second quarter, even as revenue gained about 25%. Lloyds Banking Group Plc kept its full-year target for operating costs unchanged despite continued inflation in the UK.

Deutsche Bank shares swung between losses of as much as 2.2% and gains of 2.9%. They’re down about 7% since Sewing was named to the CEO role in April of 2018.

Sewing has refocused Deutsche Bank on its traditional strengths in fixed-income and corporate banking, cutting thousands of jobs in the process and exiting equities trading. After posting the highest annual profit in more than a decade, he surprised investors this year by agreeing to buy Numis Corp. in a £410 million ($529 million) deal, his first major takeover as CEO and the lender’s biggest in more than a decade. 

The business makes up a relatively small part of the investment bank and is dwarfed by the trading desk. Fixed-income trading, the largest single revenue contributor, declined 10% in the second quarter, ahead of most of large Wall Street banks, which in aggregate saw a drop of 13% from a year earlier. 

Deutsche Bank had warned last month that trading revenue in the second quarter could drop between 15% and 20%, though Sewing also indicated that he expects the business to improve in the second half, with momentum returning after the US resolved the debt ceiling impasse.

Deutsche Bank gave a slightly more upbeat outlook for full-year group revenue, saying it will likely reach the upper end of its forecast range, with momentum in the corporate bank making up for a slightly weaker outlook for the investment bank. 

Sewing had been leaning more on the corporate and private bank to pick up the slack as the trading environment normalizes. The corporate bank reported a 25% jump in revenue in the second quarter, while the private bank saw a gain of 11%.

Signs have been mounting that the lift from higher interest rates that fueled growth at the two lending businesses is waning. Demand for loans among companies in the euro zone plunged by the most on record in the second quarter, a report showed Tuesday.

Deutsche Bank on Wednesday reported a drop in loans driven by lower demand in its commercial banking operations. Chief Financial Officer James von Moltke said there was also “some softening” in loan quality that pushed provisions for souring debt up 72% from a year earlier.

(Updates with CEO comments from first paragraph.)

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