Deutsche’s Traders Earn Some Bragging Rights
(Bloomberg Opinion) -- Not long ago, it was debatable whether accident-prone Deutsche Bank AG would ever have an investment bank that paid its way. The German lender’s fixed-income traders are putting the doubters under some pressure.
Chief Executive Officer Christian Sewing’s strategy of shrinking the investment banking business to greatness is looking increasingly convincing. The plan unveiled in 2019 involved shedding equities trading to focus on Deutsche Bank’s core expertise in debt trading. That shift from full-service investment banking was a gamble.
But Deutsche Bank clearly hasn’t missed being in equities trading in the second quarter, even while rivals made decent money in the business. Its core fixed-income and currency (FIC) trading result was strong given market conditions are normalizing after last year’s exceptional spike in activity. Revenue of 1.8 billion euros ($2.12 billion) here was down 11% year-on-year. The Wall Street firms showed falls of around 40% in the same period (as did Barclays Plc in quarterly results also announced on Wednesday). True, their comparatives may have been more challenging, but Deutsche Bank’s resilience is stark.
Sewing now oversees a FIC business whose revenue was 37% greater than in the second quarter of 2019. Goldman Sachs Group Inc. can claim similar progress but some peers have not matched their pre-pandemic performance in this business this year.
Clearly, Deutsche Bank’s corporate finance and mergers and acquisitions franchise is a work in progress. Revenue here was up just 2% year-on-year, as deal-making fees compensated for stolid results from arranging equity and debt issues.
Barclays’ equivalent business was up 19% and other rivals did better still. It is going to take time for Deutsche Bank to catch up: Advisory businesses are slow to rebuild. But overall, these results offer support for Sewing’s decision to focus resources on fixed-income rather than stay in the equities arms race, squandering investment that would never achieve the scale necessary to compete with the likes of Morgan Stanley.
Sewing said in December the investment bank needed to make at least 8.5 billion euros of net revenue for the whole firm to hit an overall goal of 24 billion euros in 2022, delivering an 8% return on equity. Favorable conditions mean the investment bank has done better over the last 12 months. Investors should surmise that Sewing’s target is really a floor. With the corporate bank, private bank and asset management businesses also performing well, it’s no surprise he says group revenue will now exceed his guidance.
Doing this with sufficient profitability remains the key challenge. The annualized return on equity in the investment bank was 13% in the quarter. Barclays’ investment bank made 15%, some Wall Street firms did better still. ROE for Deutsche Bank as a whole (which includes a loss-making unit comprising non-core assets) was only 5.5%. Regardless of Sewing’s targets, investors will want to see the firm earning returns higher than the cost of equity, put at 10% by analysts at UBS Group AG. Even so, the current valuation of the shares, at 40% of book value, isn’t giving Sewing much credit for the momentum that seems to be building.
If Sewing doesn’t have a revenue problem, he may still have a cost problem. The cost-income ratio in the investment bank jumped to 56%, up on a yearly and quarterly basis. This is a competitive market for talent (Barclays’ ratio also rose, to 55%). Traders will be hoping that Sewing is going to pay them for their performance while the bank is still in turnaround mode. But with Sewing having also dropped an absolute target for costs in 2022, investors may be nervous that once again they will lose out to bankers when the revenue begins to gush.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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