Deutsche Bank stumbles to big loss on road to reinvention

By Tom Sims

FRANKFURT (Reuters) - Deutsche Bank <DBKGn.DE> reported a bigger than forecast quarterly loss of 3.15 billion euros (£2.81 billion), underlining the challenges faced by Chief Executive Christian Sewing as he attempts to turn around the struggling business.

Germany's largest bank had already flagged it would lose around 2.8 billion euros in the quarter when it announced a restructuring plan that will see 18,000 jobs go and cost 7.4 billion euros overall.

The size of the loss, compared with a profit of 401 million euros a year ago, prompted the bank's shares to slide as much as 5.8% in Frankfurt before regaining some ground. The bigger loss stemmed from higher goodwill impairment charges than foreseen when the bank announced its restructuring on July 7.

As it reshapes, the bank expects to post a loss in 2019, meaning that it will have been in the red for four out of the past five years. But it is aiming for profit in 2020.

The bank also anticipates 2019 revenue to be lower than in 2018. That forecast marks a further scaling down in expectations from previous quarters.

Founded in 1870, the bank is considered one of the most important for the global financial system, along with U.S. heavyweights JPMorgan Chase, Bank of America and Citigroup.

But Deutsche has been plagued by losses and scandal, prompting it to embark on one of the biggest overhauls to an investment bank since the aftermath of the financial crisis.

CEO Sewing said on Wednesday that the bank had already taken significant steps in implementing the strategy. More than 900 employees had given notice or been told they would be made redundant from a bank that had around 91,500 employees.

In a note to staff, Sewing said that the lender's underperforming investment bank faced "strong headwinds" in the quarter, including questions about the bank's future that spooked clients.

"Now we can look ahead with more optimism," he wrote.

TALE OF WOE

Deutsche's troubles peaked with a $7.2 billion U.S. fine in 2017 for its role in the mortgage market crisis, in a major blow that caused clients to flee.

A new leadership, with Sewing at the helm since last year, has tried to revive Deutsche's fortunes, but problems have persisted.

In April, the bank called off nearly six weeks of talks to merge with cross-town rival Commerzbank <CBKG.DE>.

It then embarked on a plan for "tough cutbacks" to its investment bank, representing a major retreat from investment banking for Deutsche Bank, which for years had tried to compete as a major force on Wall Street.

Net revenue in the quarter fell 6% to 6.2 billion euros. Revenue at Deutsche's cash-cow bond-trading division dropped 4% in the quarter, while equities sales and trading revenue dived 32%.

The declines underscore the continued weakness at the lender's investment bank, which saw an 18% drop in net revenues during the period.

"I could make excuses," about the division's performance, Sewing told analysts. But "this simply doesn't matter. We must do better and we will do better."

RBC Capital Markets wrote that Deutsche's earnings illustrated the "long road until we have visibility on the many stepping stones" to a turnaround.

Among details of the overhaul announced earlier this month, Deutsche said it planned to scrap its global equities business and scale back its investment bank. It also reshuffled management.

The bank will set up a new so-called "bad bank" to wind down unwanted assets, with a value of 74 billion euros of risk-weighted assets.

Reuters reported on Tuesday that it will take years to shed those unwanted assets, tying up capital that could have generated income of 500 million euros a year.

Preparations to auction unwanted equity derivatives are "well advanced", the bank's finance chief told analysts.

Some investors have said they doubted these moves would be enough to turn around its flagging fortunes in the face of intense competition and low interest rates.

Others investors have said they were worried Deutsche Bank would backtrack on a pledge not to tap shareholders for additional cash, particularly in view of its capital constraints.

"I really can't say that I see the positives in this plan. I remain a bitter curmudgeon," said Barrington Pitt-Miller, portfolio manager at Janus Henderson Investors.

(Reporting by Tom Sims, Arno Schuetze, Patricia Uhlig and Andreas Framke; Additional reporting by Sinead Cruise in London; Editing by Keith Weir)