The mood music around Deutsche Bank has changed.
For the first quarter of 2021, it delivered its best financial results for seven years, with a pre-tax profit of €1.6 billion (€1 billion after tax), well ahead of analyst expectations, and a return on tangible common equity (RoTE) of 7.4% on a strong common equity tier-1 (CET1) ratio of 13.7%.
Suddenly, management’s aims to deliver an 8% post-tax return in 2022 and then start handing back €5 billion of capital to shareholders look almost conservative, instead of highly ambitious.
One big number and another smaller one stood out.
The investment bank more than doubled its profits compared with the exceptional first quarter of 2020, despite more normal levels of turnover in rates, foreign exchange and emerging markets, businesses for which the bank is renowned.
It appears that concentrating on your key strengths can pay off. Who knew?
This time, it did particularly well in credit trading and financing, and also origination and advisory, where the bank believes it has increased market share globally by 30 basis points, an unusual achievement for any European bank.
Deutsche Bank points to IPO wins even after cutting back in cash equities.
This is important because while issuers raised capital hand over fist in 2020, investors wondered if this was a one-off and so low-quality boom in earnings.
Now come the first signs that the resurgence in Deutsche’s investment bank earnings might be sustainable. Chief executive Christian Sewing expects its revenues for 2021 to be very close to 2020 levels.
The analyst consensus estimate had been that they would fall by 9% for the year, but it appears that concentrating on your key strengths can pay off.
Who knew?
And it wasn’t just the investment bank that fared well. So too did the private bank and even the corporate bank, which has been hit hard by negative rates, but now has charging agreements in place for depositors holding €83 billion.
Credit losses
The impressive small number was €69 million of provisions for credit losses, down by 86% from the first quarter of 2020. That equates to just 6bp of average loans, though the bank is guiding to 25bp for the year.
Provisions for credit losses in the investment bank fell to zero in the first quarter.
It is worth recognizing that pulling out of non-core businesses removes risks as well as revenues and that Deutsche has avoided negative impacts from what it euphemistically describes as external events of the kind we saw in the first quarter – by which it presumably means the ones that hit not just Credit Suisse and Nomura, but also, it now appears, others including Morgan Stanley and UBS.
Christian Sewing and his team gave themselves a generous 14 quarters to turn Deutsche Bank around. Halfway through that time, managing optimistic expectations is becoming the challenge.
