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Deutsche Bank goes back to 'Plan A' after merger talks collapse

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK

Deutsche Bank (DBK.DE) on Friday said its turnaround is on track despite the collapse of recent merger talks and a dive in first quarter revenues.

The embattled German lender published its first quarter results on Friday, showing a 9% fall in revenue to €6.4bn (£5.5bn, $7.1bn) but a better-than-expected 67% rise in net income to €201m.

The income outperformance was due to an aggressive cost-cutting drive by CEO Christian Sewing, who was brought in last year to help supercharge the bank’s long-running turnaround efforts. Non-interest expenses were down by 8% to €5.9bn in the quarter.

However, profits before tax fell by 32% to €292m and Deutsche Bank cuts its revenue forecast for the full-year. The bank is now telling investors to expect “essentially flat” revenues in 2019, having previously forecast “slightly higher” revenues.

The first quarter results came a day after six weeks of merger talks between Deutsche Bank and Commerzbank (CBK.DE) collapsed. Deutsche Bank pre-announced its net income beat on Thursday after the deal fell through but the shares still ended the day 1.5% lower, showing investors were disappointed with the outcome.

Deutsche Bank CEO Christian Sewing tried to emphasis the strength of the bank on Friday. He said in a statement: “Our first-quarter results demonstrate the strength of our franchise and our continued progress in executing our plans in a very challenging market environment.

“We have made progress on key business drivers: growth in loans and deposits, a recovery in assets under management, and market share improvements in corporate finance.

“Our continued cost discipline helped us to offset lower revenues and we are well on track to meet our 2019 cost target of €21.8bn.”

Deutsche Bank has underperformed European banking peers for years due to legacy issues. Sewing was brought in as CEO in April last year to speed up turnaround efforts after predecessor John Cryan was deemed too slow.

Sewing has focused on deep cuts to underperforming areas of the bank in a bid to strip out costs. This cost-cutting focus drive the net income beat in the first quarter.

Friday’s announcement contained no guidance on any new strategy after the collapse of the Commerzbank talks but Sewings comments showed that Deutsche Bank still focusing on the “Plan A” of aggressive cost-cutting.

UBS analyst Daniele Brupbacher said in a note on Friday: “The investment case moves back to our thesis laid out in our Jan 2019 note with the most likely path being a ‘muddle through’ approach whereby DB tries to cuts costs while growing and defending the revenue base. We therefore also don’t expect any radical strategic moves short-term.”

“Deutsche’s biggest problem remains its cost base, which remains well above a lot of its comparable peers, along with outdated IT systems,” said Michael Hewson, chief market analyst at CMC Markets.

“Its headcount is still over 90k in a sector that in Germany remains seriously overbanked, and where its European rivals are way ahead of them in terms of restructuring themselves, RBS being a case in point.”

The results also highlighted the difficult backdrop Sewing’s plan faces. Revenues at Deutsche Bank’s corporate and investment bank, the group’s biggest revenue driver, were down by 13% to €3.3bn in the first quarter. Sales and trading revenue was down by 19% in fixed income and 18% in equity.

“The bank hasn’t been decisive enough or ruthless enough in dealing with its problems,” Hewson said. “The fear is that Deutsche may well have left it too late in terms of restructuring its business and without government support it will slide into obscurity.”

The performance at Deutsche Bank’s investment bank tallies with other global banks who have struggled with a depressed global market in the first quarter. On Thursday, Barclays reported an 11% fall in revenues at its investment bank.

Markets have been depressed by a range of factors including global trade tensions, uncertainty surrounding Brexit, and the US government shutdown, which meant companies couldn’t file to go public as the SEC was closed. Several banks have said conditions have been improving in the second quarter. Deutsche Bank did not give any guidance on conditions.