Deutsche Bank beats expectations despite 27% drop in profit, jump in costs

Deutsche Bank on Wednesday reported a net profit of 763 million euros ($842 million) for the second quarter of 2023, narrowly beating expectations despite a 27% year-on-year decline.

The bank’s net profit attributable to shareholders slightly topped a prediction of 737 million euros in a Reuters poll of analysts, though marked a significant drop from the 1.046 billion euros reported in the same quarter of 2022, while net revenues rose 11% year-on-year to 7.4 billion euros.

However, second-quarter non-interest expenses rose 15% year-on-year to 5.6 billion euros, with adjusted costs up 4% to 4.9 billion euros. Nonoperating costs includes 395 million euros in litigation charges and 260 million euros in “restructuring and severance related to execution of strategy.”

In its first-quarter report, the bank flagged job cuts for its non-client facing staff and reported a sharper-than-expected year-on-year fall in investment bank revenues.

Deutsche’s corporate and private banking divisions enjoyed a strong quarter with revenues up 25% and 11% year-on-year, respectively, benefiting from the higher interest rate environment. However, its businesses more closely tied to the financial market backdrop — the investment banking and asset management divisions — saw revenues fall 11% and 6%, respectively.

Deutsche Bank CFO James von Moltke told CNBC that this could be attributed to an unusually strong second quarter of 2022, as market volatility boosted trading volumes and revenues.

Speaking to CNBC’s Silvia Amaro on Wednesday, von Moltke said the bank had upped its target for cost savings from 2 billion euros to 2.5 billion euros in a bid to offset the impact of inflation, and was also making substantial business investments to “support future revenue growth,” invest in technology and improve its controls.

“So for us, it’s a balancing act between delivery on the expense objectives and some of those inflationary impacts. In recent quarters, we’ve succeeded very well, we’ve delivered on our guidance of costs essentially flat to the fourth quarter of last year,” von Moltke said.

“That’s something that we’re aiming to continue. We feel like the progress we’re making and those expense initiatives is considerable and accelerating.”

Wednesday’s result marked a 12th straight quarterly profit since the German lender completed a sweeping restructuring plan that began in 2019 with the aim of cutting costs and improving profitability.

“In the first half of 2023 we again demonstrated good growth momentum across a diversified business portfolio, underlying earnings power and balance sheet resilience. This puts us on a good track towards our 2025 financial targets,” said Deutsche Bank CEO Christian Sewing.

“Our planned share repurchases enable us to deliver on our goals to distribute capital to our shareholders.”

Deutsche Bank announced on Tuesday that it plans to initiate up to 450 million euros of share buybacks this year, starting in August, and expects total capital returned to shareholders through dividends and buybacks in 2023 to exceed 1 billion euros, compared with around 700 million in 2022.

Other highlights for the quarter:

• Total revenues stood at 7.4 billion euros, up from 6.65 billion in the second quarter of 2022.
• Total non-interest expenses were 5.6 billion euros, up 15% from 4.87 billion a year earlier.
• The provision for credit losses was 401 million euros, up from 233 million in the same quarter of last year.
• Common equity tier one CET1 capital ratio, a measure of bank liquidity, rose to 13.8% from 13.6% in the previous quarter and 13% a year ago.
• Return on tangible equity stood at 5.4%, down from 7.9% a year ago.

Benefiting from the Credit Suisse collapse

Deutsche Bank previously suggested it stood to gain from the collapse of Credit Suisse and its takeover by Swiss rival UBS. CFO von Moltke told CNBC on Wednesday that some of these benefits may already be materializing.

“All of these things take time. Certainly, on the hiring front, we’ve been able to attract talent as the fallout from the merger takes place, in two areas of our business in particular: wealth management, where we’ve been able to attract around 30 relationship managers over the past several months, and also in our origination and advisory franchise,” von Moltke said.

“It’s obviously early days to see the revenue impact of those hires, but we’re very confident that we’ve been able to attract strong talent to the platform and fill in gaps, where we can now take advantage more fully of our own platform and market presence.”