Deutsche Bank Traders Keep Overhaul Alive After Volatile Year

(Bloomberg) -- Halfway through Deutsche Bank AG’s historic restructuring, Christian Sewing has to thank the investment bank that he had pledged to cut for keeping his plan on track.

But with trading set to moderate after last year’s volatility, the real test for the chief executive officer is yet to come: Can he grow the private and corporate banking units at the center of his strategy?

Germany’s largest lender on Thursday closed out a bumper year for the securities business with a 17% jump in fixed-income trading, the second straight quarter in which it beat most Wall Street peers. While the performance helped give Sewing the first annual profit in six years, it left Deutsche Bank more dependent on debt trading than it has been in a decade as the other operating units continued to shrink.

“We do expect a normalization of the market environment in 2021,” Chief Financial Officer James von Moltke said in an interview with Bloomberg TV. “The very high levels of 2020 really weren’t going to be sustainable.”

Deutsche Bank fell 1.1% at 10:13 a.m. in Frankfurt trading, after gaining as much as 3.9% earlier in the day. The stock is the best performer of the large European investment banks over the past 12 months, though it remains about 90% below its 2007 peak.

Sewing, who refocused Deutsche Bank in 2019 on its historical strength in corporate lending, has seen his strategy turned upside down over the past year as a return of volatility revived the securities unit while negative interest rates depress traditional banking. The boost from trading has kept Sewing’s plan largely on track even as provisions for bad loans jumped in the wake of the Covid-19 pandemic and negative interest rates weighed on lending income.

“It’s been a gift, frankly, to them that capital markets have held up as well as they have,” Matthew Fine, a portfolio manager at Third Avenue Management, said by phone before earnings were released. “Revenue has not deteriorated markedly and they have actually been able to build capital through this period.”

Deutsche Bank’s traders outperformed their Wall Street peers partly because credit trading was particularly strong last quarter, in which the German lender has traditional strength, a person familiar with the matter said. It was also a poor quarter for U.S. rates, where U.S. banks are much bigger, the person said, asking not to be identified discussing the private information.

For the bank as a whole, net income for the quarter came in at 51 million euros, compared with a 1.6 billion-euro loss a year ago. A key measure of capital strength increased, beating analysts’ estimate, and the lender said in a presentation that it saw “robust revenue momentum” going into 2021. For the full year, net income attributable to shareholders of 113 million euros was the first annual profit by that measure since 2014.

But outside of the investment bank, none of the other operating businesses -- the corporate bank, private bank and asset management -- were able to increase revenue last quarter. The corporate bank saw a decline of 4% in the quarter, led by a 6% drop in global transaction banking -- the business Sewing had highlighted when he first presented his strategy in mid-2019. The private bank fared a little better, shrinking 1% in the quarter.

“Over time, the headwinds from the interest rate environment begin to abate for those businesses, so you’ll see more of the underlying growth flow through,” von Moltke said. “They’re doing a great job executing on the strategies they articulated to grow revenues, and we expect that to continue now.”

What Bloomberg Intelligence Says:

Deutsche Bank’s results show its plan is being executed, with double-digit FICC revenue year-over-year growth sustained in January signaling an encouraging extension of momentum in early 2021.

Alison Williams, banking analyst

With economies across the globe recovering from the pandemic shock amid vaccine rollouts and massive government spending, some investors have even started to wager on higher inflation and, eventually, interest rates. While that would bolster income from lending, similar bets have proven premature before -- for investors as well as for bank executives.

Deutsche Bank in 2019 unveiled its biggest restructuring in two decades, exiting equities trading and trimming the larger fixed-income operation. Sewing, a former corporate banker, had initially planned more aggressive cuts to trading but soon pinned his hopes on the business when it became clear that negative interest rates would weigh on the bank’s other operations for longer.

Revenue from fixed-income trading rose to 1.38 billion euros in the fourth quarter from a year ago, more than a quarter of group revenues. For the full year, the trading business contributed almost 30% of revenue.

Even though Deutsche Bank’s fixed-income unit is smaller than those at most U.S. peers, which averaged $2.46 billion of revenue in the quarter, it contributes a larger share to the group’s top line, according to Bloomberg Intelligence.

The bank was considering to raise average bonuses for its traders by 10%, Bloomberg News reported in December, but the final number may now be even higher, a person familiar with the matter has said.

“We’re obviously very mindful” of the recommendation from the European Central Bank to exercise extreme moderation on bonuses, von Moltke said. “We of course need to balance that with what was a strong performance year and the need to compensate people for that,” he said, calling the decision “an ongoing process.”

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