February 1, 2019 / 2:26 PM / 6 months ago

Breakingviews - Deutsche Bank reprieve is only temporary

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) - Deutsche Bank is not dying, judging by its 2018 results. But nor is the lender rising from the sick bed anytime soon. Its first net profit in four years is a welcome tonic for long-suffering shareholders. Chief Executive Christian Sewing’s planned cost cuts will, however, have to be supplemented by revenue growth if the bank is to meet a meagre 4 percent return on tangible equity target this year.

That is less than half the objective of around 10 percent objective that former boss John Cryan had targeted by 2018. The abyss into which investors’ expectations have since plunged is clearly shown by the mere 1 percent drop seen in shares on Friday after Deutsche delivered less than one-tenth of that.

Still, CEO Sewing deserves credit for hitting, rather than simply committing to, an underlying target cost base of 23 billion euros. A surprise additional 200 million euros in savings gave him enough confidence to pledge a cost base of 21.8 billion euros by the end of 2019 rather than the 22 billion euros originally envisaged. Significantly, annual expenses fell faster than revenue – by a single percentage point – a feat which eluded his predecessors.

That helped pre-tax profit climb 8 percent from a year earlier to 1.3 billion euros and spared investors a fifth consecutive annual net loss. But Sewing can’t slice his way to greatness. Even if he hits his cost target, revenue will have to rise by around 2 percent from a year earlier if Deutsche is to meet its low-ball 4 percent ROTE 2019 aim, according to Breakingviews calculations which assume flat loan losses, a 35 percent tax rate and a tangible book value of 54 billion euros.

But growing the top line may not be easy if investment banking revenue, which accounts for nearly two-fifths of Deutsche’s total, continues its steady decline. Trading revenue at the lender’s fixed-income franchise fell by 23 percent in the fourth quarter compared with the previous year, underperforming US peers.

Optimists might argue that shares trading at a bombed-out 70 percent discount to tangible book value represent a buying opportunity. But Deutsche failed to grow revenue for the third consecutive year in 2018. Sewing may have stemmed the bleeding but that doesn’t mean Deutsche is leaving the recovery ward anytime soon.


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