Deutsche Bank Posts Sharp Fall in Profit Amid Vast Overhaul

By Jenny Strasburg

Deutsche Bank AG said Thursday net income in the first quarter declined 79% and that it will shrink its U.S. investment bank, the latest sign of struggle at the German lender, which this month replaced its CEO and reshuffled several other top executives.

The bank said it is pulling back in certain trading and lending activities that don't make enough money to justify costs and risks, especially in the U.S. and Asia. It will eliminate jobs in its investment bank, describing the cuts as a "material workforce reduction" through the rest of this year, without providing numbers.

Hedge funds will get less of Deutsche Bank's balance sheet to amplify their stock trades. German and European wealthy clients and companies will get more funding and attention from Germany's biggest bank, Deutsche Bank said.

Investors have been calling for such moves amid signs that Deutsche Bank's strategy was failing. The actions reflect pressures on the lender to scale back its global ambitions and cut costs after years of losing market share to stronger banking rivals.

The bank's net income fell to EUR120 million ($145.9 million) in the quarter. Companywide revenues declined 5% to EUR7 billion. First-quarter revenues in the investment bank declined 13% to EUR3.8 billion, with fixed-income trading revenues down 16% and equities sales trading revenues down 21%. Euro exchange rates and some one-time events helped amplify the trading-revenue declines. All of the bank's major divisions saw revenue declines.

The first-quarter report is Deutsche Bank's first since it ousted Chief Executive John Cryan, a Briton, on April 8, replacing him with Christian Sewing, a German executive who has spent his entire career at Deutsche Bank.

Mr. Sewing most recently oversaw the retail- and commercial-banking division, after years in senior risk-control and auditing positions. He is shepherding plans to curtail the lender's once-lucrative businesses in its division that advises companies on deals, underwrites stock and bond offerings and trades securities.

"There is no time to waste," Mr. Sewing told analysts on a morning call, saying the dismal first-quarter results underscored the "need for immediate action." He promised further changes in coming months, saying that he and other Deutsche Bank executives understand why investors have lost patience.

"The call to action is simple: Focus, grow revenues and significantly reduce costs," Mr. Sewing said. He said executives "will not agonize over decisions."

That remark reflected persistent complaints from Deutsche Bank supervisory and management board members that Mr. Cryan was sharply analytical but slow to make difficult decisions, helping create a state of paralysis in Deutsche Bank's top ranks, according to people inside and outside the bank. Mr. Cryan hasn't commented on the criticism.

Deutsche Bank said it plans to shrink its equities-trading business and its prime-brokerage business, which loans money and securities to hedge funds and other trading clients. It will scale back trading in U.S. interest rates and focus on helping European clients do deals, manage their cash and global payments and hedge currency risks.

Mr. Sewing said the "material workforce reduction" will focus on the investment bank, including cuts to technology and other back-office jobs. The bank will also continue to shed real estate.

In the past three weeks, Deutsche Bank announced that two other senior executives besides Mr. Cryan--investment-banking co-head Marcus Schenck and operations and technology chief Kim Hammonds--will leave effective next month. Their departures, tied to the CEO change, are part of the third high-level shake-up at the lender since Mr. Cryan took over as CEO less than three years ago.

As part of the changes, Deutsche Bank put Garth Ritchie, previously co-head of the investment bank, in charge of that entire division, and named a new chief operating officer from the retail-banking division. That new operations chief, Frank Kuhnke, won't serve on the management board, unlike his predecessor; the role was downgraded to one level below the senior ranks.

Under Mr. Cryan, Deutsche Bank settled big legal cases that had hung over the lender, raised $8.5 billion in capital and set about cutting billions in expenses. But it missed cost-cutting targets and suffered continued revenue declines, losing market share to stronger rivals and posting three consecutive full-year net losses.

Deutsche Bank's shares have fallen 24% this year and are down more than 30% from a year ago. Investors and analysts have been demanding that executives clarify the bank's strategy, with some saying its U.S. investment bank should give up competing head-to-head with bigger, stronger U.S. competitors.

In recent weeks, Deutsche Bank executives both publicly and privately have resisted calls to alter the lender's strategy dramatically. They've argued that maintaining most of the global investment-banking operations is key to the lender's core mission of serving German companies abroad, while conceding that those businesses do need to be trimmed.

Even compared to other European investment banks still battling through multiyear turnarounds, Deutsche Bank's challenges are immense, investors say. Its German home market trails the U.S. and U.K. in retail- and investment-banking profitability, and compared to its big Swiss rivals, Deutsche Bank lacks scale in private banking and wealth management. Those deficits leave Deutsche Bank more reliant on volatile trading and investment-banking revenues, despite ongoing attempts to depend less on those businesses.

Write to Jenny Strasburg at jenny.strasburg@wsj.com

(END) Dow Jones Newswires

April 26, 2018 03:31 ET (07:31 GMT)

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