Deutsche Bank Profit Plunges Amid Turnaround Effort -- 4th Update
July 27 2016 - 6:57AM
Dow Jones News
By Jenny Strasburg
Deutsche Bank AG on Wednesday said its second-quarter net income
fell 98% from a year earlier, hurt by weaker performances in
trading and investment banking, as well as restructuring costs.
Chief Executive John Cryan told analysts that the German bank
must do more to control costs, and warned of "more ambitious" steps
if market conditions remain difficult. He also said that banking
customers will increasingly feel the impact of low interest rates,
a fundamental symptom of Europe's economic woes.
"We don't think that banks will just sit there and absorb the
costs themselves," Mr. Cryan said on a conference call after the
bank released earnings. Banks will likely increase fees and take
other measures to pass on the pain, he said.
The German lender said net income fell to EUR20 million ($22
million) from EUR818 million a year earlier, while net revenue
dropped 20% to EUR7.4 billion. The bank beat average net-income
forecasts of analysts, whose expectations had ranged widely from a
quarterly loss of more than EUR1 billion to a profit of more than
EUR500 million.
The bank's shares traded down more than 4% after earnings were
reported.
The results from Europe's most globally prominent investment
bank showed a stark divide between the recent fates of European and
U.S. banks.
Deutsche Bank executives emphasized how much harder-hit the
German lender was by Europe's wobbly economy and political
uncertainty, in contrast to big U.S. banks that benefited from
their relative strongholds in more resilient U.S. markets.
Mr. Cryan said in a statement that Deutsche bank is making
progress in a multiyear turnaround, but warned that if weak market
conditions persist, it "will need to be yet more ambitious in the
timing and intensity of our restructuring."
Deutsche Bank's shares have dropped 45% this year, compared with
a 27% decline on the Stoxx Europe 600 banks index. Investors have
sold European bank shares since the U.K. voted June 23 to leave the
European Union.
The Frankfurt-based bank has been hit harder than most. It is
cutting costs and clients and trying to satisfy new, more-stringent
capital requirements over the next three years. It has further to
go to meet those requirements than many peers do.
Deutsche Bank's turnaround strategy has eaten into trading and
investment-banking revenue. Investors' concerns about the adequacy
of its capital cushion have persisted, but executives have said
that a capital raising isn't in their plans.
The bank also has been trying to settle regulatory
investigations it expects will result in big fines, as well as
civil lawsuits, another uncertainty for investors. Executives said
Wednesday that they are still hopeful the bank will settle the
biggest regulatory investigations this year. The bank said in its
half-year report that it has started talks with the U.S. Department
of Justice to resolve claims related to mortgage-back securities,
one of the two biggest-ticket legal items the bank faces.
Low interest rates and economic uncertainty stemming from Brexit
weighed on the lender's biggest businesses last quarter. Revenue
fell year-over-year in all four of Deutsche Bank's business
divisions, including asset management.
The worst year-over-year revenue decline was in global markets,
the bank's sprawling securities-trading operation and its biggest
unit by revenue. That division's second-quarter revenue declined
28% from the year-earlier period, to $2.4 billion. Within the
business, overall sales and trading revenue fell 23% during the
quarter from a year earlier. Debt-trading declines were an outsize
drag on performance, because fixed-income products account for a
far bigger chunk of trading business.
The lender said some of the declines were rooted in previously
announced decisions to shrink Deutsche Bank's global footprint to
cut risks and leverage and meet tougher regulatory requirements.
Expenses related to job cuts also weighed on results. So did a
decision to transfer some assets into the global markets business
from asset management, where Deutsche Bank said they didn't
fit.
Lower compensation in the trading business helped results,
Deutsche Bank said. Investors have been concerned that the
business, which has historically generated healthy profits, has
been losing too much talent, but Marcus Schenck, the bank's finance
chief, said there was "nothing abnormal" in staff attrition rates
in the unit.
Investment-banking revenue was down 12% from a year ago, to $1.9
billion, after suffering from what Mr. Cryan called "paralyzed
markets" in Europe.
In July 2015, Mr. Cryan, a former banker and finance chief of
UBS Group AG, took over as co-chief executive of Deutsche Bank,
replacing Jürgen Fitschen and Anshu Jain. Mr. Fitschen stayed on as
co-CEO until May and remains an adviser. Mr. Jain left last year.
Mr. Cryan is now sole CEO.
Deutsche Bank's common equity Tier 1 ratio, a key measure of
high-quality capital, improved slightly from the first quarter, to
10.8% as of June 30, but the ratio is still down from its year-ago
level of 11.4%.
Write to Jenny Strasburg at jenny.strasburg@wsj.com
(END) Dow Jones Newswires
July 27, 2016 06:42 ET (10:42 GMT)
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