Deutsche Bank flags deeper cuts as trading drop hits profit

The headquarter of German company Deutsche Bank in Frankfurt, Germany.
The headquarter of German company Deutsche Bank in Frankfurt, Germany. PHOTO: AFP

FRANKFURT (BLOOMBERG) - Deutsche Bank Chief Executive Officer John Cryan signaled the German lender may have to deepen cost cuts after second-quarter profit was almost wiped out by a slump in trading and restructuring costs.

Net income decreased to 18 million euros (S$27.1 million) from 796 million euros a year earlier, the company said in a statement on Wednesday. Analysts forecast a loss of 22 million euros, according to the average of 11 estimates compiled by Bloomberg. The global markets unit, which houses securities trading, posted a 28 per cent drop in net revenue.

Mr Cryan, 55, has been cutting risky assets, freezing dividend payments and eliminating about 9,000 staff to boost capital levels and reverse a slump in shares. While the CEO has called 2016 a peak restructuring year, his task has been complicated by mounting legal costs, record-low interest rates and volatile markets, with Britain's decision to exit the European Union clouding economic prospects and potentially weighing on deal- making across the region.

"Cryan has an enormous job if you want to reconstruct the bank, refocus the platform and get the bank in the right kind of shape," Chris Wheeler, a London-based analyst at Atlantic Equities, told Bloomberg Television's Jonathan Ferro on Wednesday. "The decline in revenue tells you that there's a really bad background that Deutsche Bank is having to cope with in terms of carrying out this restructuring."

Deutsche Bank slipped 3.8 per cent to 12.36 euros at 1:35 p.m. in Frankfurt, bringing losses to about 45 per cent this year. The company has the lowest price-to-tangible book value of the world's nine largest investment banks. The discount indicates that it's worth less than investors would expect to receive if the firm liquidated its assets.

Net revenue fell 19 per cent to 7.39 billion euros in the second quarter, while risk-weighted assets slipped 3.4 per cent to 402 billion euros. The cost-to-income ratio, a measure of profitability, was 91 percent, up from 85 per cent a year ago.

Restructuring and severance expenses surged to 207 million euros in the second quarter from 45 million euros a year earlier, while the bank also took a goodwill charge of 285 million euros tied to the transfer of businesses.

"There's just no significant progress on capital, risk- weighted assets or profit so far," said Jochen Schmitt, an analyst at Bankhaus Metzler with a sell recommendation on the stock. "That has made people uncomfortable with the shares."

The company missed a goal of completing the sale of a 20 per cent stake in Chinese lender Huaxia Bank Co. in the second quarter, a key step in raising capital levels. That transaction will be completed in the second half, adding about 40 basis points to the capital ratio, according to the statement.

Mr Cryan has repeatedly said he doesn't plan to sell shares, telling investors in May that the firm is making progress with its overhaul and that he is "convinced we can realize this transformation with our own funds."

The CEO wrote in a letter published on Wednesday that while "doubts were raised" about the lender's financial strength, they were "unjustified." The bank "will do everything in our power to accelerate" planned restructuring measures, Mr Cryan said.

"While our results show that we are undergoing a sustained restructuring, we are satisfied with the progress we are making," he said. "If the current weak economic environment persists, we will need to be yet more ambitious in the timing and the intensity of our restructuring."