February 2, 2018 / 11:33 AM / 19 days ago

Breakingviews - Deutsche Bank fails even to hurdle low bar

LONDON (Reuters Breakingviews) - John Cryan is “not yet satisfied” with Deutsche Bank’s results, following a third consecutive annual net loss. He can say that again. Last month’s profit warning meant investors knew what was coming, but Deutsche still managed to give them an unpleasant surprise.

Cryan has some positives to cling to. A 29 percent fourth-quarter drop year-on-year in fixed income sales and trading revenues was better than some U.S. peers. Last year, Cryan managed to strip out an impressive 900 million euros in core costs. The bank made a 1.28 billion euro pre-tax profit compared to a pre-tax loss last year, albeit due to lower impairments and litigation expenses. And a common equity Tier 1 ratio of 14 percent is well in excess of a 13 percent target, hinting that shareholders may be able to expect meaningful resumption of dividends this year, particularly if the planned partial listing of the lender’s asset management division occurs.

The problem remains a lack of top-line growth. Including equities, Citi analysts reckon combined quarterly sales and trading revenue underperformed U.S. peers year-on-year. Poor results from the investment bank were expected. But annual revenues were flat at the private and commercial bank and increased by just 2 percent at the showpiece asset management division, even allowing for lost income from “strategic disposals”.

In this light, the abandonment of the group cost target adds a blow upon a bruise. Cryan now aims for 23 billion euros in adjusted costs in 2018 versus 22 billion euros guided previously, thanks to changes in timing to planned disposals. Deutsche said this will be “more than offset” by retaining those assets’ revenue streams. That is cold comfort, however, if the pernicious trend of revenue falling faster than costs continues. Even stripping out Deutsche’s myriad one-offs, adjusted costs fell by 4 percent year-on-year compared to adjusted revenues declining by 5 percent.

The result is a nearly one-fifth decline in tangible book value over the year. After a 6 percent decline on Friday the bank’s shares traded at around half book value. Until top-line growth recovers, such a discount will persist.

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