DBK Deutsche Bank AG

By Patricia Kowsmann 

It looked like Deutsche Bank AG was finally going to have a good year. Then the coronavirus came, forcing it to set aside money for loan losses, disrupting targets and clouding the bank's outlook.

The uncertainty is an unwelcome development for the German lender, which for years has struggled to make money and clean up a massive portfolio of complex and risky bets that it is set aside to wind down or sell. An overhaul of its business-focused around cost-cutting and making its investment-banking unit leaner was starting to bear fruit.

"This changed environment will impact Deutsche Bank's results of operations, capital ratios and the capital plan that underlies our targets," the bank said as it officially announced its first-quarter results Wednesday.

Deutsche Bank said that its revenue for the full year is expected to fall slightly in 2020 compared with last year, as its main businesses of lending and serving clients will remain flat, while asset disposals in its capital release unit -- a type of bad bank -- may face headwinds given the market turmoil. Provisions for credit losses, meanwhile, are expected to increase significantly from low levels.

All that combined means the bank doesn't know whether it will be able to finally record a pretax break-even result for the year, following a EUR2.6 billion ($2.8 billion) pretax loss last year.

"First-quarter [performance] was well ahead of our plan," James von Moltke, Deutsche Bank's financial chief said in a conference call. "It's too early to say what the rest of the year will look like."

Deutsche Bank said it has set aside EUR506 million to cover credit losses in the first quarter ended March 31, including EUR260 million directly related to the virus. More will come, although Mr. von Moltke said he is comfortable with the quality of the bank's loan book.

Despite all that, first-quarter results were actually strong and better than expected, mostly thanks to an 18% jump in investment-banking revenue. Its fixed-income trading business did particularly well, as customers shifted their assets around to better weather the virus storm, resulting in big fees and commissions.

Overall profit for the three months ended March 31 still fell 67% to EUR66 million, from EUR201 million a year ago. But the figure beat analysts' expectations, thanks to a higher-than-expected revenue of EUR6.35 billion. Revenue at its corporate bank unit, which caters to clients like midsize German companies, fell 1% from a year ago. It rose 2% at its private and retail banking.

Shares of the bank have risen over 19% since late Sunday, when the bank reported parts of the results. They are still down close to 6% since the beginning of the year.

Mark Fedorcik, head of the investment bank, said the unit was doing well before the virus spread in Europe in March, with revenue growth and market-share gains. Once the virus hit Europe and the U.S., he said corporate clients focused on getting liquidity through credit lines, issuance of debt in the markets and in some cases loan waivers. Institutional investors, meanwhile, repositioned their investment portfolios based on their risk appetite.

"We are seeing some fixed-income markets normalize and stabilize as we move to the end of April," Ram Nayak, head of fixed income, said.

For the rest of the year, the bank said it expects investment-banking revenue to decline from the stronger first-quarter levels, leaving it overall slightly higher in 2020 compared with last year. Corporate banking and private banking revenue are expected to stay flat. But bigger loan-loss provisions will hurt their bottom line.

The bank remained on track with its cost-cutting drive, a key part of a plan it launched last year meant to make it a leaner and profitable lender focused on European companies and retail-banking customers. Deutsche Bank reported costs fell 5% in the first quarter.

Controlling costs is key for Deutsche Bank and other European lenders given low and negative interest rates across the region making it difficult to make money. Germany's banking system is also the least profitable in the eurozone due to its overcrowded market of more than 1,500 banks.

There too, the coronavirus is an unwelcome development. While the bank said it remains committed to its targets, it paused layoffs last month until some stability returns. Chief Executive Christian Sewing has promised to cut 18,000 of its approximately 92,000 jobs by 2022.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com

(END) Dow Jones Newswires

April 29, 2020 06:43 ET (10:43 GMT)

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