Deutsche Bank Wants to Make Its Traders Happy

(Bloomberg Opinion) -- A full year into Deutsche Bank AG’s deepest restructuring in decades, Chief Executive Officer Christian Sewing has plenty to be pleased about. Bolstered by the trading bonanza that has lifted the whole of Wall Street, Deutsche is on course to return to a pretax profit this year, while putting the bulk of the restructuring costs behind it.

Sewing is even hoping to pay his top dealmakers bigger bonuses for 2020 — a bold sign of confidence in the midst of a pandemic. Deutsche is the best performing stock among European lenders this year. But it remains to be seen whether a leaner, refocused bank can improve its measly profitability without over-relying on its traders.

Revenue from fixed-income trading at Germany’s largest lender rose 47% in the third quarter to 1.8 billion euros ($2.1 billion), Deutsche said on Wednesday, compared with an average 25% jump at its top-five U.S. rivals. This helped the company post a third-quarter profit. Analysts had expected a loss.

Deutsche’s revenue across its four core units exceeded 24 billion euros over the past 12 months, meaning the bank is already close to hitting its 2022 target. It remains on course for 19.5 billion euros of adjusted costs for this year, and it’s still working toward a return on tangible equity of 8% for 2022. That measure of profitability stood at 1.5% in the three months through September.

As part of Sewing’s reorganization, Deutsche has exited equities trading and is trying to refocus its investment bank around its strongest fixed-income activities. Chief Financial Officer James von Moltke said the bank should maintain its recent market share gains in this business. He’s also confident that Brexit and the U.S. elections will keep creating swings in asset prices, bolstering trading opportunities.

Nevertheless, it’s too early to be certain about whether Deutsche really has snatched business from its rivals, or whether it’s simply benefited from an industrywide pickup in activity in areas such as credit and foreign exchange. Absent another bumper year in the securities unit, the struggle with making money from consumer banking in Germany will complicate Sewing’s reorganization once again.

Deutsche investors will be comforted by lower-than-feared credit losses from the pandemic so far. The bank should benefit from having more than half of its lending exposure to Germany, a more robust economy than most. But its loan book will be tested as Europe returns to strict Covid-19 lockdowns. It has been less aggressive than peers in provisioning for potential bad loans.

Meanwhile, pressure on commercial-lending revenue will persist as interest rates stay low, hurting Deutsche’s other units too. In the nine months through September, net revenue at its corporate and private banks fell 1% from the year-earlier period, while asset management sales fell 2%. The bank is at least charging for deposits at its corporate bank, bringing in an extra 55 million euros in the quarter. But that’s marginal compared with the huge gains in trading.

Now wonder Sewing, who’s improved the bank’s capital buffers, is eager to persuade regulators that Deutsche is solid enough to pay juicy bonuses this year. He’ll need to succeed to keep hold of all those top-performing rainmakers.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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