Saturday, 11 July 2020

Deutsche Bank reports profitable quarter driven by revenue growth in core businesses

Deutsche Bank reported a profitable first quarter of 2020 while growing revenues in its core bank and maintaining balance sheet strength. Capital remained substantially above regulatory minimum levels, while credit provisions grew from low levels in the prior year, reflecting a deteriorating macro-economic environment impacted by COVID-19. 

“In the current crisis, we have shown robust numbers and demonstrated strong performance in support of our clients across all core businesses,” Deutsche Bank’s chief executive officer Christian Sewing said.

Group profit before tax was $224 million (EUR 206 million), despite bank levies of $546 million (EUR 503 million) and pre-tax transformation-related effects of $187 million (EUR 172 million). These effects comprised transformation charges of $91.3 million (EUR 84 million) and restructuring and severance of $95.6 million (EUR 88 million). First-quarter net income was $71.7 million (EUR 66 million).  

The bank continued its strategic transformation as planned. Revenue and expense performance in the core bank reflected continued momentum and execution of strategic priorities. Of the total transformation-related effects anticipated between 2019 and 2022, 73% have now been recognised. The number of employees on a full-time equivalent (FTE) basis declined by 930 to 86,667 at the end of the quarter. 

Provision for credit losses was $550 million (EUR 506 million), or 44 basis points of loans, and included approximately $282 million (EUR 260 million) related to COVID-19. Provision for credit losses taken in the quarter increased allowance for loan losses to $4.7 billion (EUR 4.3 billion), equivalent to 95 basis points of total loans. The full-year 2020 outlook is for provision of credit losses of 35-45 basis points of loans. 

The core bank, which excludes the capital release unit, reported adjusted profit before tax of $1.2 billion (EUR 1.1 billion), up 32%, driven by 7% growth in revenues specific items and a 4% reduction in adjusted costs ex-transformation charges.

The capital release unit recognised a pre-tax loss of $833 million (EUR 767 million), which was in line with internal expectations. The unit continued to make progress with asset reduction despite challenging conditions. Leverage exposure was reduced by $9.8 billion (EUR 9 billion) to $128.2 billion (EUR 118 billion) in the quarter, while risk weighted assets were down $2.2 billion (EUR 2 billion) to $47.8 billion (EUR 44 billion).

Supporting clients through unprecedented challenges

All Deutsche Bank’s core businesses supported clients through exceptionally challenging market conditions. The corporate bank is supporting approximately 5,200 applications, with a volume of (EUR 4.4 billion), from customers related to the German government-sponsored KfW loan programme. Across its German network, Deutsche Bank has trained around 3,000 staff to provide specialist advice to clients on KfW and COVID-19 related topics. The corporate bank also earmarked $21.7 billion (EUR 20 billion) for new credit extension to companies.

The investment bank has helped companies, governments and agencies raise more than $163 billion (EUR 150 billion) in debt to finance their activities since the outbreak of COVID-19 in mid-March 2019. 

The private bank continues to provide direct access to clients through 290 Deutsche Bank and all 800 postbank branches, more than any other German bank, supported by advisors providing advise by telephone and online. Daily logins reached approximately $2.7 million (EUR 2.5 million) per day, call centre volume has risen by around 30% and securities transactions processed for clients peaked at more than double average volumes.

Deutsche Bank’s German mobile distribution network (Mobiler Vertrieb), with more than 1,200 agents, handled more demand and served clients more intensively than at any time in its 32-year history, with sales up by 34% year on year.

Asset management has advised clients through its DWS Direkt channel, which saw volumes 50% above average, while volumes of digital activity through the DWS website and social media channels, rose by 25% and 32%, respectively. 

Deutsche Bank has been active in helping communities around the world meet the challenge of COVID-19. The bank donated 575,000 medical masks to the municipalities of Frankfurt, Berlin and Bonn. In addition to making a $543,262 (EUR 500,000) donation, the bank is matching employee donations of over $651,915 (EUR 600,000) to food and shelter charities around the world to support some of those most impacted by the pandemic.

In India, Deutsche Bank has provided isolation rooms and family survival kits, and partnered with the Akshaya Patra Foundation to provide one million meals to homeless and daily wage labourers in four cities.

Balance sheet strength despite growth in lending

Conservative balance sheet management enabled Deutsche Bank to support clients through extremely challenging economic and financial market conditions during the quarter. Risk weighted assets grew by $18.5 billion (EUR 17 billion) to $370 billion (EUR 341 billion), partly reflecting growth in loans of $27.2 billion (EUR 25 billion) or 6%. 

The common equity tier 1 (CET1) capital ratio was 12.8% at quarter-end, compared to 13.6% at the end of 2019, and approximately 240 basis points above regulatory requirements. This development was driven by: 

Liquidity reserves remained strong at (EUR 205 billion) at the end of the quarter, down by 8% from (EUR 222 billion). This development largely reflected drawdowns on committed facilities as the bank supported demand from clients. However, the liquidity coverage ratio, at 133%, remains $46.7 billion (EUR 43 billion) or 33%, above regulatory requirements. 

Provision for credit losses was 44 basis points of loans, reflecting conservative underwriting standards, strong risk management and a low-risk, well-diversified loan portfolio but higher year on year driven by the aforementioned impact of COVID-19. Investment bank provision for credit losses was 111 basis points of loans, driven by rating migrations, increased drawdowns on committed credit facilities and updates to the macro-economic outlook.

Revenue growth in core businesses despite challenging conditions late in the quarter

Group revenues were about $7 billion (EUR 6.4 billion), flat year-on-year, despite the bank’s exit from equities trading in July 2019. Revenues in the core bank were about $7 billion (EUR 6.4 billion), up 7% year-on-year both on a reported basis and excluding specific items, reflecting delivery on the bank’s transformation strategy. 

In the corporate bank, revenues were $1.4 billion (EUR 1.3 billion), essentially flat year on year. Continued progress on strategic execution, including deposit repricing measures, helped to offset the impact of ongoing interest rate headwinds.  

In the investment bank, revenues were $2.5 billion (EUR 2.3 billion), up 18%. This was driven by 13% growth in fixed income and currencies, with strong growth in foreign exchange and rates, which more than offset significantly lower revenues in credit.

In rates, Deutsche Bank gained market share and ranked second in electronic US Treasury trading in March, according to Bloomberg. Origination and advisory revenues were up 8%, as growth in debt origination more than offset lower revenues in advisory. Deutsche Bank recaptured the number one position in corporate finance in Germany with a market share of just under 14%, its highest since 2014, according to Dealogic. 

In the private bank, revenues rose 2% year-on-year to (EUR 2.2 billion), driven by 9% revenue growth in wealth management, or 17% excluding gains related to workout activities, which partly reflected strategic hiring in previous periods. In the private bank Germany as well as private and commercial business international, fee income from investment products largely offset interest rate headwinds. 

In asset management, revenues were essentially flat versus the prior year, as 9% growth in management fees was offset by negative changes in the fair value of guarantees driven by lower interest rates. Net asset outflows were a relatively modest $2.2 billion (EUR 2 billion), after inflows of $27.2 billion (EUR 25 billion) during 2019. 

Sustained progress on cost reduction in line with strategy     

Non-interest expenses were $6 billion (EUR 5.6 billion) in the first quarter, down by 5% versus the prior year. Adjusted costs were about $6 billion (EUR 5.5 billion), down by 7%.

Adjusted costs ex-transformation charges were about $6 billion (EUR 5.5 billion) in the quarter, down by 8% year-on-year. Adjusted costs included bank levies primarily relating to Deutsche Bank’s contribution to the single resolution fund of $547 million (EUR 503 million), and $106 million (EUR 98 million) of reimbursable expenses associated with the transfer of the bank’s prime finance platform to BNP Paribas. 

Adjusted costs ex-transformation charges and bank levies were $5.3 billion (EUR 4.9 billion), representing the ninth successive quarterly year on year reduction. Deutsche Bank reaffirmed its 2020 target of $21.2 billion (EUR 19.5 billion) in adjusted costs ex-transformation charges and reimbursable expenses associated with the BNP Paribas transfer. A reduction in compensation and benefits expenses was driven by workforce reductions, while reduced information technology expenses reflected lower software amortisation. Bank levies in the quarter declined by 17% versus the prior year period. 

Re-disseminated by The Asian Banker

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