Deutsche Bank AG signaled the trading boom that helped it beat Wall Street rivals will continue through the end of the year, boosting investment banking revenue and compensating for headwinds at its lending businesses.
Income from trading fixed-income securities and currencies rose 47%, beating all but one of the large investment banks so far and snapping a long streak of market share losses. That propelled Deutsche Bank to a 182 million-euro ($214 million) profit in the third quarter, compared with a loss that analysts had predicted.
“We not only demonstrated continued cost discipline, but also our ability to gain market share,” Chief Executive Officer Christian Sewing said in a statement Wednesday. The securities unit continues to perform well so that revenue there will be “significantly higher” for the full year, the lender said, raising a previous guidance for higher revenue at the business.
Five quarters into a historic restructuring that aimed to emphasize lending and reduce reliance on trading, Sewing is increasingly dependent on the securities unit as the corporate bank keeps shrinking. While the market bonanza prompted Deutsche Bank to raise its forecast for the investment bank, questions about the sustainability of the rally and the pandemic’s second wave weighed on the shares.
Deutsche Bank fell 3.3% at 9:57 a.m. in Frankfurt, declining along with the broader market. The stock is still one of the best performers this year among European lenders.
It’s “a good set of results,” Citigroup Inc. analysts including Andrew Coombs wrote in a note. Still, the investment banking “industry backdrop is unlikely to be as supportive for Deutsche Bank in 2021.”
The debt trading result compares with gains of about 25% for the biggest Wall Street banks. Only Goldman Sachs Group Inc. did better, with a 49% increase. Sewing said earlier this year that trading would slow in second half, but some of those predictions haven’t come to pass.
So far this year, growth at Deutsche Bank had trailed the competition even as it benefited from the rally, though the third quarter snapped that streak. Sewing, who also heads the investment bank, has said the division’s growth is only partly driven by the buoyant market and partly the result of changes made under his leadership.
Debt trading “has continued a moderation in October but the environment is still supportive,” James von Moltke, Deutsche Bank’s chief financial officer, said in an interview. “In the other businesses we are expecting stable conditions in the fourth quarter relative to the third.”
Key figures from Deutsche Bank’s third quarter
The gains for now have alleviated concerns the business may be too damaged after years of piecemeal cuts under Sewing’s predecessors. The bank last year unveiled its biggest restructuring in two decades, exiting equities trading and trimming the larger fixed-income operation. Sewing, a former corporate banker, had initially planned more aggressive cuts to debt trading but reversed course when it became clear that negative interest rates would weigh on the bank’s other businesses for longer.
Before today, shares of Deutsche Bank had rallied 14% this year, the best performance among European lenders. That also reflects the fact that other banks were hit hard by a de-facto ban in Europe on dividend payments, whereas Deutsche Bank hadn’t planned a payout while it’s going through the restructuring.
What Bloomberg Intelligence Says:
There’s greater confidence in Deutsche Bank’s restructured franchise, we believe, following FICC trading revenue gaining an adjusted 43% year-over-year, along with a 15% growth in origination and advisory fees that outpaced consensus. There was also progress in capital, costs and more-modest noncore asset reductions. A 49% surge in FICC trading revenue (dollar terms) matches Goldman Sachs’ leading increase, exceeding the aggregate 25% jump for U.S. peers.
Deutsche’s FICC Blowout, Fee-Gain Boost Needed Momentum: React
Alison Williams, financials analyst
Lenders including UBS Group AG, Banco Santander SA and HSBC Holdings Plc have signaled they’re ready to resume dividends or share buybacks once regulators lift restrictions. Their optimism contrasts with warnings by European governments that renewed lockdowns could become inevitable if they can’t stem the rise in infections. European banking regulators, who had been moving closer to lifting a de-facto dividend ban, are increasingly worried about the worsening economic outlook.
Deutsche Bank set aside 273 million euros for bad loans in the quarter, slightly less than a previous guidance of 300 million euros. The lender in previous quarters provisioned less than many competitors for the pandemic, citing the quality of its loan book and its exposure to Germany, which has released enormous government aid to support its economy.
That quality may be tested over the coming months as Chancellor Angela Merkel is pushing for tougher curbs on movement and contact, including closing bars, restaurants and leisure facilities, according to a draft federal government briefing paper obtained by Bloomberg. The paper will form the basis for discussions with regional premiers later on Wednesday, before Merkel holds a news conference to announce the measures agreed.