(Bloomberg Opinion) -- After all this time, Deutsche Bank’s problem is still costs.
The German lender is progressing through its latest overhaul, launched in 2019, and still expects to get group-wide expenses to less than 70% of its revenue next year. But it has hit another bump along the way.
Deutsche Bank reported third-quarter revenue and profit that beat expectations on Wednesday, but the stock fell more than 6%. One problem was that bump: The bank said it would be spending an extra 700 million euros ($812 million) on its ongoing overhaul.
A big chunk of this came from switching some computing to cloud companies, including Google. This kind of thing is meant to save costs, but getting the details right is tricky. As the bank has been working out exactly what it wants Google and others to do, it has realized for example that it needs less data storage than first thought.
Ultimately, it will pay less for those services day-to-day, but it has had to pay to renegotiate those contracts: about 400 million-euros worth it turns out.
Deutsche Bank also added another 200 million euros in restructuring and severance charges, but the bank is confident that this transformation bill won’t grow further and that it will be mostly paid by the end of this year. The extra charges are still unwelcome and will hurt the bottom line for 2021.
It has done well in cleaning up its investment bank at least, the source of many of its past problems. Costs there have been less than 60% of revenue this year and last, which is perfectly respectable. Within this business, Deutsche Bank’s main focus is fixed-income, currencies and commodities trading, which suffered a 12% drop in third-quarter revenue versus last year.
Market activity has waned for all in this field. Deutsche Bank’s FICC business did better than Barclays and Citigroup, but worse than JPMorgan Chase & Co. and Bank of America. But Deutsche Bank, like Goldman Sachs, gets a boost from FICC financing, where it creates complex, often private, loan and bond deals for clients. That suggests the plainer parts of FICC that it shares with its other rivals may have been worse than headline revenue suggests. It doesn’t give details in its report.
Deutsche Bank’s 80%-owned fund management unit, DWS Group GmbH, was one bright spot. Inflows beat forecasts, driving up revenue and profits. That’s another division that seems to have its costs in hand.
Lastly, profit in Deutsche Bank’s corporate and consumer units beat forecasts, but those gains were driven by lower bad-debt charges than expected in the latter and releases from provisions in the former.
The underlying business for the consumer bank still looks like one of the toughest to sort out: Its costs are about 90% of its revenue. Deutsche Bank wants to make it more efficient with technology — which is proving costlier and more complex to install than it expected — and by reducing staff. Getting rid of people in Europe and especially Germany is a slow and expensive process.
Even then, Germany is just a very hard market in which to turn a profit in banking. One of its own analysts wrote a trenchant critique just ahead of the German elections in September. His timing was terrible from a political perspective and the report was hastily withdrawn. That doesn’t make it any less true.
This is a key business because it is Deutsche Bank’s second-largest revenue pool after the investment bank.
If Deutsche Bank hits its revenue and cost targets for the end of 2022, they add up to a return on tangible equity – a forgiving measure of profitability – of 8%. That’s still a somewhat underwhelming number. Without broader German banking reform like that suggested by its own analyst, it’s still hard to see how Deutsche Bank actually becomes an attractive investment.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.
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