Deutsche Bank AG flagged mounting headwinds from inflation and credit quality, after litigation and investments fueled a bigger-than-expected jump in operating expenses.
(Bloomberg) — Deutsche Bank AG flagged mounting headwinds from inflation and credit quality, after litigation and investments fueled a bigger-than-expected jump in operating expenses.
The worsening cost outlook overshadowed second-quarter revenue and profit that beat analysts’ estimates, as the corporate bank continued to benefit from higher interest rates. The lender’s fixed-income traders weathered a broad slowdown in the business better than most peers.
“We must maintain rigid discipline when it comes to our costs,” Chief Executive Officer Christian 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.”
Sewing has vowed to further increase revenue and profitability and late Tuesday announced a €450 million ($500 million) buyback, seeking to lift a share price that remains below the level when he took over as CEO five years ago. But the slowdown in trading 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.
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 fell 2.2% at 10:34 a.m. in Frankfurt trading. They’re down about 9% 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 Numis transaction is a bet that the advisory and underwriting businesses will come back from an industry-wide slump. Most Wall Street giants beat estimates for equity and debt underwriting last quarter in a sign of life for the business.
Deutsche Bank said on Wednesday it expects origination and advisory revenue to rise significantly this year as debt sales recover. But it also said that the rebound in the business was slower in the first half than it previously expected, leading it to downgrade the full-year revenue outlook for the investment bank.
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.
Read More: Deutsche Bank Feels Flip Side of Rate Hikes as Loans Deteriorate
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.
But rising costs remain a headache. Deutsche Bank in April announced plans to cut about 800 senior back-office staff. Last week, it agreed to pay a $186 million penalty after a US Federal Reserve investigation found that it failed to put in place sufficient measures to prevent money laundering after earlier violations.
Litigation and severance payments pushed expenses 15% higher in the second quarter, more than analysts had expected. Costs for the full year are now expected to increase slightly, also reflecting the impact of the Numis deal. The bank had previously guided for flat expenses.
At the same time, Deutsche Bank gave a slightly more upbeat outlook for full-year revenue, saying it will likely reach the upper half 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 over the past year 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 are 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.
Sewing has set a target for a return on tangible equity, a measure of profitability, of at least 10% by 2025, and recently indicated that the lender may exceed that goal.
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