ii view: Deutsche Bank issues a surprise update

A profit against an expected loss; is the German bank on the mend or will Covid send it backwards again?

Update ahead of first-quarter results

• Expects to report a net income profit of €66 million 
• Revenues are expected to be €6.4 billion

ii round-up:

In a surprise announcement ahead of its first-quarter results on Wednesday 29 April, Deutsche Bank (XETRA:DBK) has outlined key details.

The German bank expects to report a quarterly profit of €66 million compared to analyst expectations for another loss. Revenue of €6.4 billion is expected against forecasts of €5.7 billion. A lift in trading at its fixed income business on the back of volatile Covid-19 markets could underlie the revenue beat.  

Deutsche shares rose by more the 10% in early German trading having fallen by more than 12% year-to-date.  

As with US rivals JPMorgan (NYSE:JPM) and Citigroup (NYSE:C), credit loss provisions rose sharply given expectations for bad debts on the back of the corona crisis, hitting €500 million - over three times higher than the first quarter of 2019.  

In July last year, Deutsche announced plans to pull out of global equities sales and trading, scale back investment banking and slash thousands of jobs as part of a sweeping restructuring plan to improve profitability. 

Deutsche management warned last month that the hit from Covid-19 could hamper its ability to meet its financial targets as it undergoes a significant restructuring after years of losses. 

ii view:

Early action to take losses, restructure, rebuild the balance sheet and decide on what the new focus will be following the 2008 financial crisis, was taken by many US and UK banks. For Deutsche, true appraisal of its position appears far more recent. 

Having now outlined a strategy to become a simpler, more efficient, less risky and better capitalised bank, Covid-19 is another hurdle to overcome.  

For investors, the outcome has been disappointing. The share price is down more than 75% over the last five years compared to a gain of over 40% for JP Morgan and a fall of less than 20% for Citigroup.

Action to scale back its investment banking business appears sensible. Battling Goldman Sachs (NYSE:GS) or JP Morgan, headquartered in the backyard of many of the world’s biggest companies, has always been a big ask. However, given a number of false dawns at Deutsche, investors may require more concrete evidence of a recovery before taking action.

Positives:

• Management action to transform and refocus its operations is being pursued
• The transfer of assets to a bad bank allows greater focus on the core bank

Negatives:

• The bank is moving to become less diverse
• Cuts in interest rates are broadly considered bad for banks

The average rating of stock market analysts:

Sell