July 16, 2018 / 2:19 PM / a year ago

Breakingviews - Deutsche Bank surprise points to fragile stability

Christian Sewing, new CEO of Germany's Deutsche Bank, addresses the audience during the bank's annual meeting in Frankfurt, Germany, May 24, 2018. REUTERS/Kai Pfaffenbach

LONDON (Reuters Breakingviews) - Three cheers for Deutsche Bank! The embattled German lender on Monday produced a rare positive surprise: second-quarter results weren’t quite as atrocious as analysts had feared. The fact that boss Christian Sewing pushed through deeper cost cuts without revenue plummeting suggests Germany’s largest lender has reached a nadir. However, despite an 8 percent jump in Deutsche’s share price, investors shouldn’t get too excited: a slump in trading revenue augurs plenty more pain to come.

The unexpected mid-morning announcement, nine days before Deutsche is due to report results, was required because quarterly net income of 400 millions euros is more than double the 159 million euros projected by analysts. That was the result of cost cutting which yielded 200 million euros more in savings than expected. Crucially, revenue held up. The top line of 6.6 billion euros is broadly the same as last year’s second quarter, and better than the 6.4 billion euros analysts had penciled in. Equally important, Deutsche’s common equity Tier 1 capital ratio of 13.6 percent at the end of June was around 30 basis points higher than consensus.

Success is relative, though. Even after Monday’s bounce, Deutsche shares trade at a bombed-out valuation of 0.4 times tangible book value. Even that valuation looks generous considering that annualised return on tangible equity in the second quarter was little more than 3 percent, according to Breakingviews calculations.

The first half of the year is usually more lucrative for investment banks, so profitability may yet decline. Trading revenue, which accounts for around a quarter of the group total, declined 15 percent year-on-year in the second quarter. By contrast, JPMorgan reported a 13 percent increase in trading revenue over the same period.

Sewing still has to push through the bulk of at least 800 million euros in annual savings. And earnings were flattered by a one-off 100 million euro gain from selling assets. Having seen shares decline by 39 percent before Monday, investors can rightly welcome a fragile stability. Recovery, however, remains some way off.


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