Raphael Stevens

The choppy waters of commodity trading have claimed another victim. On April 23rd it emerged that ING, a Dutch lender, was suing ICBC, China’s biggest bank. ING accuses ICBC of releasing export documents to Maike, a trader that once handled a quarter of China’s copper imports, without first collecting payment owed to ING. Shortly after this Maike ran out of cash, sinking hope of recouping the money. Now ING is seeking $170m from ICBC for its alleged error. Such disputes are becoming painfully common in the industry responsible for ferrying food, fuel and metals around the world. Last year traders stopped supplying a Chinese metals merchant after $500m-worth of copper went AWOL. In February Trafigura, a trading giant, booked $600m in losses after discovering that cargoes of nickel it had bought were in fact worthless stones. Last month the London Metals Exchange (lme) found bags of stone instead of nickel at one of its warehouses. The 40-odd banks that finance the bulk of the $5.5trn-worth of raw materials which travel the globe every year are often on the losing end of such scandals. France’s Natixis and Italy’s UniCredit were among those fooled in 2020 when Gulf Petrochem, a now-defunct trader, misdelivered oil, before fleeing creditors. JPMorgan Chase is the unlucky owner of the 54 tonnes of fake nickel found by the lme. Commodity trading has long been vulnerable to foul play. Unlike manufactured goods, such as cars or smartphones, common raw materials are priced according to public benchmarks. These can move far and fast, wrong-footing traders; the widespread use of financial instruments to hedge against, or speculate on, price movements can magnify losses. Commodity trading is full of obscure middlemen, sheltered in countries with lax policing, that have little reputation to lose. Lately there have been wild swings aplenty. In April 2020, as lockdowns sapped demand for energy, the collapse of Hin Leong, a Singapore-based oil trader accused of fraud, left 23 banks on the hook for $3.9bn. Last year Maike used its pricey copper to raise funds to bet on Chinese property—shortly before zero-covid policies and debt rationing strangled the sector. Rising prices for fuels and metals seem to have made trickery all the more appealing. More frequent scandals, and stricter rules on risky lending in rich countries, have prompted a few banks to backtrack. ABN Amro, a Dutch lender, quit commodity-trade finance in 2020. BNP Paribas and Rabobank have trimmed their portfolios. Yet instead of retreating, most big banks have refocused on the larger traders. Trafigura, which borrows from some 140 banks, increased its credit lines by $7bn to $73bn last year. Meanwhile, smaller firms in countries for which commodities trading is bread-and-butter, such as Switzerland, where the industry employs 10,000 people, can still find enough working capital to go on, notes Jean-François Lambert, an industry consultant. Singapore’s three main banks remain active lenders, too. Commodity-trade finance will only get more alluring. The industry is growing fast and ever hungrier for capital. Its aggregate gross margin has doubled since 2009, when markets boomed, to a record $115bn. McKinsey, a consultancy, estimates that volatile commodity prices, rising interest rates and longer shipping times will push traders to look for an extra $300bn-500bn in working capital between 2021 and 2024. For many governments, worried about the supply of raw materials, commodity trading has become strategic. Earlier this year Germany and Italy said they would guarantee loans to Trafigura, lowering risk for its creditors. Local midsized banks are pondering an entry, says an industry veteran. Existing players are upping their game as well. In January Standard Chartered named its first commodity-trade chief. Last year Mitsubishi bought BNP’s American commodity-finance arm. Years of volatility bode well for the big traders—and few banks are willing to miss the boat. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

After Russia invaded in February last year, Ukraine’s finance minister, Serhiy Marchenko, braced, logically enough, for government revenues to “plummet”. He says he expected them to fall by roughly as much as economic activity. That did not happen. Although Ukraine’s gdp plunged by 29% in 2022, the state pulled in just 14% less than the year before.The war has led to big drops in tax revenues from imports and tourism. Blackouts caused by Russian attacks on power plants and the grid, which began in earnest in October, disrupt automated reporting of taxable transactions. What, then, is behind the state’s “unique results”, as an official puts it, in wartime revenue collection?One explanation is that firms and taxpayers, eager to support their country’s defence, are paying more tax than required. According to Ukraine’s finance ministry, in March last year such donations came to 26bn hryvnias ($880m), rising to 28bn in May. These are considerable sums. Estimates vary, but last year Ukraine’s total revenues, excluding donations, perhaps amounted to some $37bn, reckons Maksym Dudnyk, a tax partner at pwc, who shuttles between the consultancy’s offices in Warsaw and Kyiv. Widespread thinking, he says, goes like this: if Ukraine wins, you’ve got your country; if Russia wins, thuggish authorities will take your money anyway, so why not help out now?Many Ukrainians are also paying their taxes early. Constantin Solyar of Asters, a law firm in Kyiv, recounts a meeting with a client shortly after Russia’s onslaught began. When the client asked how his company could go about prepaying taxes, Mr Solyar was so moved he could “barely hold my tears”. This sort of early payment has since become normal. A year or so on, Mr Dudnyk says that nearly all the 100-odd clients he serves have begun to prepay.As Illya Sverdlov of Kinstellar, another law firm, points out, doing so is not entirely altruistic: it also generates good pr, with some companies trumpeting the gesture in the media. But plenty are chipping in quietly, too. The conflict has even led some Ukrainians who have lived abroad for years and who are not public figures to begin paying taxes back home, says Mr Solyar. Efforts to seek loopholes to lower tax bills appear to have decreased.Perhaps most astonishingly, the State Tax Service of Ukraine continues to receive payments, through its online portal, from occupied territories (albeit not from Crimea, where Russia’s grip is strongest). For people in such areas, the pressure to pay Russian taxes is enormous, says Mr Marchenko, Ukraine’s finance minister. Lots of local businesses must also grease the palms of Russian commanders and militias to get permission to keep operating. Even so, last year 2.3m individuals and organisations in occupied areas paid $9.5bn in taxes to Ukraine. They are braving the risk of retribution from Russian “punishers”, who have a fondness for brutality.Yet patriotism is not the only reason for higher-than-expected tax revenues. Levies on gas production rose early last year. Danil Getmantsev, chair of the Ukrainian parliament’s Committee on Finance, Taxation and Customs Policy, also points to a crackdown on corruption that has included the dismissal of many tax officials. That effort may have something to do with the increased scrutiny of Ukraine’s governance from Western donors. Even in a time of war, the taxman must still do his job. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

When America unshackled its economy from pandemic-era restrictions two years ago, it also unlocked inflation. By mid-2021, consumer prices were rising by more than 5% compared with the previous year. China’s later, faster reopening is now more than three months old. But inflation remains locked down. Consumer prices rose by only 0.7% year-on-year in March, slower than anywhere else in the world. This newspaper described China’s reopening as the biggest economic event of the year. So why has it had such a small effect on prices? Some suspect the recovery is weaker than the official statistics portray. Analysts at China Beige Book, which relies on independent surveys to track the country’s economy, told clients they were “snickering” at official figures showing that retail sales surged by 10.6% in March compared with the previous year.But growth looked laughably strong only when set against 2022, which was lamentably weak. Judged against earlier years, growth in retail sales was more modest and thus more credible. Compared with March 2021, for example, sales grew at the more modest annual pace of 3.3%. What is true of retail sales is true of the broader economy. The recovery from last year’s nadir is real and robust. But the recovery to pre-pandemic trends is partial and uneven. China spent much longer under lockdowns than America. It may therefore have further to go before it returns to anything like full capacity. Take property. Although sales this year are stronger than they were late last year, especially in the big cities, they remain far weaker than in 2021 (a boom year) or even 2020. Rents are still falling, contributing to low inflation. The drop in the price of fuel for vehicles has also made a difference. China’s great reopening was supposed to lift global energy prices, prolonging the rest of the world’s battle against inflation. Yet as America and Europe have courted recession, oil prices have dropped. The rest of the world’s battle against inflation has curtailed energy prices, prolonging weak inflation in China. China’s reopening has departed from the script in other ways, too. In America, workers armed with “stimmy” cheques from the government felt able to cut their hours, quit their jobs or badger their bosses for better pay. There was much talk of a “Great Resignation”. China’s households have had no such luck. They received little direct help from the government under its zero-covid regime. Their labour supply was not therefore “distorted by excessive transfers”, as economists at Morgan Stanley, a bank, point out. Indeed, even as China’s reopening has strengthened demand for goods and services, it has improved China’s capacity to supply them. The lifting of restrictions removed bottlenecks and unsnarled supply chains. Despite a weak global economy, China’s exports rose by almost 15% year-on-year in dollar terms in March, as firms finally cleared a long backlog of orders.Psychology may also help explain China’s inflationless recovery. Companies do not raise prices lightly. If they are not sure stronger demand will persist, they will remain reluctant to charge customers more. China’s economy is growing despite lingering doubts. But inflation may be weak because of them. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Stand in the middle of the teeming Meena Bazaar in Dubai and it is not hard to imagine you are 1,200 miles across the Arabian Sea in Mumbai. Lanes are filled with names like Biryaniwalla & Co, Mini Punjab Restaurant and Tanishq jewellery. Arabic works as a means of communication; so, too, do Hindi and Malayalam. The financial institution with perhaps the greatest prominence, looming over the Dubai Creek, is Bank of Baroda, which is controlled by the Indian state. Rather than serving merely as an ethnic enclave, the Meena Bazaar is the visible tip of a vast, growing network of Indian businesses—one that includes many of the most important companies in the United Arab Emirates (uae). To live in Dubai is to play a part in Indian commerce. The local business chamber reports that some 11,000 Indian-owned companies were added to its records in 2022, bringing the total number to 83,000. Trade links between the two countries are getting ever tighter.Behind these companies stands a vast diaspora: 3.5m Indians live in the uae, compared with 1.2m Emiratis. These expats collectively sent home $20bn in 2021, a transfer exceeded only by remittances from America to Mexico (see chart). Many in Mumbai joke that Abu Dhabi and Dubai are now the cleanest Indian cities. For the uae, India is a source of food, gems, jewellery, leather, people, pharmaceuticals and investment opportunities. For India, the uae is a crucial source of capital and, increasingly, a place where Indian business can efficiently connect with global markets away from its homeland’s debilitating red tape, crippling traffic, stalled airport immigration lines and punitive taxes.This relationship would have been unimaginable in 1973, when a store selling Indian saris gave the Meena Bazaar its name. Abu Dhabi was desperately poor. Insufficient desalinisation meant water was often brackish. Until 1966 a version of the Indian rupee, called the “external rupee”, served as the area’s currency. The uae had only emerged from what was known as the Trucial States, tribal lands linked by old treaties, in 1971. Almost all international trade, which (pre-oil) mostly consisted of diamonds, pearls and gems, passed through Bombay. Half a century later, conditions have turned on their head. Crowded Emirati malls glitter with the world’s most sophisticated products. Indian gem traders fill Dubai’s 68-storey Almas Tower, fed by ground-level restaurants such as Delhi Darbar Express and Mumbai Masala.Travel between the two regions is frenetic and growing. Emirates, Dubai’s flagship airline, is capped by Indian authorities at 66,000 seats a week; it wants another 50,000 and argues higher limits would benefit other carriers, too. Mumbai businessmen frequently make day trips to the uae. Many choose to stay longer, often with “golden” ten-year visas. A survey by the Indian Embassy in the uae finds that 60% of chief financial officers of major firms are Indian. Pankaj Gupta, a fund manager who moved to Dubai from Delhi 25 years ago, says Indians can be found in top jobs across industries in the Emirates. Nominal trade between the two countries has grown by 16% in the past year, boosted by a trade deal that went into effect in May. This has had an impact on the geography of Indian success. “Affluent India has a new residential address,” as the Times of India has put it. Mukesh Ambani, India’s richest citizen, broke Dubai’s house-price record in August with the purchase of a property for $80m (replete with ten bedrooms, indoor and outdoor swimming pools, a beach and a private spa, it sits at the tip of a palm-fringed archipelago). He then broke that record with a $163m purchase in October (about which details are more scarce). All told, Indians last year spent $4.3bn on housing in Dubai, twice as much as in 2021. Figures on commercial purchases of property are harder to unearth, but one banker reports that interest has been just as intense. These are spurred by odd provisions in India’s tax code that push people who want to get cash out of the country into property investments.The uae’s tax system exerts its own pull: there are no personal taxes. By contrast, Indian income taxes approach 40% and come on top of swingeing consumption levies. Corporate-income taxes are not only higher in India, they are also bewildering in their complexity. There are other important legal differences. The uae technically operates under strict Islamic law. In practice, it now has commercial courts that operate under international standards and a tolerant view of vice. It also encourages religious pluralism. Abu Dhabi recently built an enormous Hindu temple and combined Muslim-Christian-Jewish centre. India is technically secular with established common law. But in practice it offers clogged courts, strictly enforced anti-alcohol and vice laws, and increasing religious strife.Closer links with the uae are to the advantage of those doing in business in India, too. Beginning in 2020, when Mr Ambani raised billions of dollars from the uae’s many sovereign-wealth funds, the country has increasingly been seen as an important source of capital. Bain, a consultancy, reckons that between 2018 and 2022, Emirati sovereign-wealth funds and other private-equity firms invested $34bn in India, in steadily rising amounts.The range of investments is impressive. There are direct stakes in some of India’s leading banks, manufacturers and startups. It is widely assumed that if Gautam Adani, India’s second-richest tycoon, recapitalises his businesses, a crucial source of finance will be Abu Dhabi, which has already invested billions of dollars in several of his companies. All of this suggests that the Emirates is evolving into a financial capital for India. Yet this evolution is not free of obstacles. In March last year the uae was put on the “grey list” by the More

It takes two to make a market, which inevitably sets the scene for contradictory opinions. Yet rarely do the signals sent by different markets seem quite as much in conflict as they do today. Here is an incomplete list:Traders of futures linked to interest rates expect the Federal Reserve to raise rates on May 3rd, and then to cut them later this year. For six months expectations of rate cuts have caused the yield on ten-year government bonds to be lower than that of three-month ones—an “inverted” yield curve that, historically, has been a harbinger of recession.The stockmarket has shrugged off recession fears. America’s s&p 500 index has risen by 14% from its trough last October; the shares of some firms—such as big tech—have done much better.In March Silicon Valley Bank was brought down, as tighter monetary policy reduced the value of its bond portfolio. Since then falling rate expectations have caused bonds to rise in price. But bank stocks have barely recovered, suggesting investors remain gloomy. It is difficult to see how all these signals could be correct. Equally, it is difficult to see how they could all be wrong. Normally, the riskiest moments in finance arrive not when different sets of investors hold wildly contradictory views, but when large numbers of them are thinking along similar lines. Recall the near-universal fawning over tech stocks as the dotcom bubble inflated. Or the widespread delusion, in the run-up to the global financial crisis of 2007-09, that securitisation had transformed risky mortgages into safe but high-yielding bonds. In each case, the degree of consensus set the stage for a “pain trade”: a market convulsion that hurt virtually everybody at once. Yet even among today’s mutually exclusive opinions there is a scenario that would undo investors’ positions in every market at once. The pain trade of 2023 would be caused by a robust economy and sustained high interest rates.To see why, start with how professional investors are positioned. Every month Bank of America carries out a survey of global fund managers. April’s found them to be almost record-breakingly bearish, which on its own suggests a brightening outlook would wrongfoot many. This tallies with the contradictory signals from markets. In aggregate, fund managers have loaded up on bonds more than at any time since March 2009, pushing yields down. Nearly two-thirds think the Fed will cut rates in the final quarter of this year or the first quarter of next year. They are shunning the stocks of financial firms more than at any time since the first covid-19 lockdowns. Their top candidates for the most crowded trade are “long big tech stocks” and “short us banks”.Every one of these positions would be harmed by a strengthening economy and sustained high interest rates. Rising long-term yields would force bond prices down and wreck bets on the Fed cutting. Though banks’ bond portfolios would suffer, steady growth and an upward-sloping rather than inverted yield curve would boost their lending margins and help their shares recover. Without rate cuts, big tech firms would lose access to cheap borrowing, and the higher yields available on bonds would make the uncertain promise of future revenues less attractive by comparison. Their immediate earnings prospects might improve. But with valuations already sky-high, their scope to benefit from this would be limited.Admittedly, this scenario is far from the most likely outcome. The Fed itself thinks that rates will eventually settle at around 2.5%. Investors and pundits predicting ongoing hawkishness are vanishingly rare. Monetary tightening has already caused global markets to plunge, Britain to flirt with a sovereign-debt crisis and America to experience banking turmoil. The idea that the economy hums along even as rates stay high or rise further seems far-fetched.Yet monetary policy could also stay tight amid a slowing economy, and that alone would give investors a bloody nose. Inflation, though falling, remains unslain. Jerome Powell, the Fed’s chairman, is determined not to repeat the mistakes of the 1970s by giving up the fight against rising prices too early. And it is not only central banks that influence interest rates. As politicians squabble over America’s debt ceiling, the risk is growing that they miscalculate, trigger a sovereign default and send borrowing costs spiralling by accident. This might seem like a remote risk. But almost by definition, pain trades always do.■Read more from Buttonwood, our columnist on financial markets:Warren Buffett is shaking Japan’s magic money tree (Apr 20th)What luxury stocks say about the new cold war (Apr 13th)Stocks have shrugged off the banking turmoil. Haven’t they? (Apr 5th)Also: How the Buttonwood column got its name More

It is an idea so seemingly obvious as to need little elaboration: people’s feelings influence their behaviour. In the economic realm this truism helps explain why surveys of consumer sentiment garner attention. They are seen as predictive of spending trends and, by extension, the state of the economy. But pause for a moment to examine how exactly sentiment affects the economy, and the causal chain starts to look sketchier. At the current juncture, when many think America is on the brink of recession, this oft-cited but fallible leading indicator merits closer inspection.Understanding consumer spending is a holy grail for forecasters, since it accounts for about two-thirds of American gdp. Get it right, and the rest of the economy becomes much clearer. But the past couple of years have not been kind to those who focus on sentiment as a guide to future spending. The most closely watched index of consumer sentiment, published monthly by the University of Michigan, plunged to its lowest reading in more than four decades in 2022, and yet consumer spending remained resilient, even after accounting for inflation. This year, by contrast, the Michigan gauge has gained ground, and yet other indicators, including bond yields and lending flows, are flashing warning signs.The main explanation for why sentiment has been more of a misleading than a leading economic indicator is that inflation has outweighed much else in consumers’ minds. To generate their measures, interviewers ask people questions such as whether they think the economy is heading in a good direction and whether they are planning to make big purchases. Consumers tend to be gloomy when prices soar, as happened last year. They give short shrift to slightly more complex factors, such as the big stash of savings many accumulated during the covid-19 pandemic.But the gap between subjective pessimism and objective reasons for greater optimism highlights a quandary. The claim is that people’s feelings, whether justified or not, matter. When gloomy, they ought to spend less. If they contradict their own feelings and keep spending, then what exactly is the value of sentiment data?It is a question that has bugged economists since consumer surveys got going after the second world war. In 1955 the Federal Reserve examined re-interviews of respondents, conducted a year after initial surveys, to see whether expectations predicted subsequent expenditures. Officials concluded that they did not. Rather than that being the final word, however, the sentiment industry only expanded over the years. In 1967 the Conference Board introduced its own consumer survey. In the 1980s abc, a television network, started sponsoring a weekly version, which was later taken over by Bloomberg, a data and media firm. Morning Consult, a pollster, launched a daily survey in 2018. Evidently, there is a big market appetite for sentiment indices, whatever their flaws.To understand why, it is useful to consider a weaker case for such indices: not that they foretell the future but that they can reveal the present. An article in 1994 in the American Economic Review found that data on consumer confidence significantly improved forecasts of consumption growth when it was the sole explanatory factor. The problem is that when other variables such as incomes or employment were known, confidence data contributed little to the forecasts. On an intellectual level that is a damning assessment of the role of sentiment, showing that feelings by themselves have little bearing on the economy. But it indicates that surveys may have some use: sentiment reflects what people personally know about their incomes and their jobs, and it is these variables that ultimately influence their spending.Sentiment gauges are especially prized given the time lag in economic data. The University of Michigan, for instance, published its preliminary consumer-sentiment index for April on the 14th. The Bureau of Economic Analysis will not publish data on personal incomes for April until May 26th. But even in such instances, their usefulness can easily be overstated. Monthly variations in sentiment surveys tend to be minor and volatile, much like the variations in spending patterns that they foreshadow.A paper by the European Central Bank in 2011 found that sentiment indices were most useful in periods of upheaval. The bottom fell out of consumer surveys, for example, towards the start of the global financial crisis of 2007-09. Likewise, John Leer of Morning Consult notes that his company’s consumer index turned sharply negative in late February 2020, a month before the covid-induced downturn. Yet in truth, sentiment was far from the only sign that the economy was in trouble: a sharp sell-off in the stockmarket occurred at the same time, reflecting the barrage of bad news about the pandemic. Consumer surveys added to the picture of economic malaise. They hardly conjured it out of thin air.Head in the cloudsArguably the biggest virtue of sentiment surveys is simply that so many in the market monitor them. And it is not just investors. When the Fed raised interest rates by a whopping three-quarters of a percentage point last June—its first of four increases of that size—Jerome Powell, the central bank’s chairman, said that one factor was a jump in inflation expectations in the University of Michigan consumer survey. Duly informed, investors paid extra heed to the Michigan inflation reading for the next few months.Could the downbeat sentiment indices of the past year eventually look prescient? There is, beyond consumer surveys, plenty of reason to think that an American recession may be in the offing at last: fallout from banking-sector turmoil and the ongoing debt-ceiling debacle come just as the labour market is starting to cool. But as Zachary Karabell wrote in a book about leading indicators in 2014, the conclusion is a more frustrating one: “Sentiment gauges are right just often enough to make them compelling and wrong far too frequently to make them reliable.” You do not want to look at them too closely, even if you cannot make yourself look away. ■Read more from Free exchange, our column on economics:Is China better at monetary policy than America? (Apr 20th)How the state could take control of the banking system (Apr 12th)Why economics does not understand business (Apr 4th)Also: How the Free exchange column got its name More

London-based Barclays beat analyst expectations Thursday, reporting net profit of £1.78 billion ($2.2 billion) for the first quarter.
Higher rates boosted net interest income at Barclays UK, while the bank’s consumer, cards and payments division grew by 47%.
Chief Executive Officer C. S. Venkatakrishnan said the results were “strong” and would allow the bank to “customers and clients through an uncertain economic environment.”

The headquarters of Barclays Plc beyond the West India Quay Docklands Light Railway station in the Canary Wharf financial district in London, UK, on Monday, March 20, 2023.
Bloomberg | Bloomberg | Getty Images

LONDON — Barclays on Thursday reported net profit of £1.78 billion ($2.2 billion) for the first quarter, beating expectations and coming in 27% higher year-on-year.
A consensus Reuters poll of analysts forecast net profit at £1.432 billion.

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On a branch basis, income from the bank’s consumer, cards and payments division rose 47%, compensating for just 1% growth in its corporate and investment bank division. It partly attributed this to its acquisition of retailer Gap’s credit card portfolio.
The income of Barclays UK was up 19% due to improved net interest income.
The bank also flagged £500 million in credit impairment charges, which it said resulted from higher U.S. card balances and the “continuing normalisation anticipated in US cards delinquencies.”
Impairment charges are used by businesses to write off assets. In its previous results, Barclays said it set aside £1.2 billion for such charges last year, as its customers struggled with cost pressures.
Barclays shares were up 4.3% at 8:55 a.m. in London.

Analysts at Jefferies said the “robust” results suggested scope for consensus upgrades, with “not a lot to nitpick.”

On track

Barclays said it “remains on track to deliver its 2023 targets, with all performance metrics in line with or ahead of guidance” at the first quarter.
Chief Executive Officer C. S. Venkatakrishnan described it as a “strong” quarter, with income up 11% to £7.2 billion.
“The momentum across the group allows us to maintain a robust capital position, deliver attractive returns to shareholders, and support our customers and clients through an uncertain economic environment,” he said in a statement.
The results come after a turbulent period for the global banking sector, which saw the collapse of U.S.-based Silicon Valley Bank and several other regional lenders in early March and the rapid takeover of Credit Suisse by Swiss rival UBS.
Earlier on Thursday, Deutsche Bank reported first-quarter net profit of 1.158 billion euros ($1.28 billion), coming above a consensus forecast of 864.54 million euros.
The bank was briefly swept up in the banking volatility of last month, when its stock plunged and  credit default swaps — a form of insurance for a company’s bondholders against its default — rose sharply.
Market watchers are once more focusing on U.S. banks this week, after First Republic revealed heavier-than-expected deposit outflows in the first quarter, with its stock dropping to a record low. More

Net profit attributable to shareholders was comfortably above a consensus forecast of 864.54 million euros produced by a Reuters poll of analysts.
This marked an 11th straight quarter of profit for the German lender after the completion of a sweeping restructuring plan that began in 2019 with the aim of cutting costs and improving profitability.

A Deutsche Bank AG branch in the financial district of Frankfurt, Germany, on Friday, May 6, 2022.
Alex Kraus | Bloomberg | Getty Images

Deutsche Bank on Thursday reported a net profit of 1.158 billion euros ($1.28 billion) for the first quarter, emerging from a turbulent month that saw it swept up in market fears of a global banking crisis.
Net profit attributable to shareholders was comfortably above a consensus forecast of 864.54 million euros produced by a Reuters poll of analysts, and up from 1.06 billion euros for the first quarter of 2022.

This marked an 11th straight quarter of profit for the German lender after the completion of a sweeping restructuring plan that began in 2019 with the aim of cutting costs and improving profitability.
“Our first quarter results demonstrate the relevance of our Global Hausbank strategy to our clients and underscore that we are well on track to meeting or exceeding our 2025 targets,” said CEO Christian Sewing.
“We aim to accelerate execution of our strategy through a number of measures announced today: raising our ambitions for operational efficiency, boosting capital efficiency to drive returns and support shareholder distributions, and seizing opportunities to outperform on our revenue growth targets.”
The Thursday report nevertheless showed deposits fell over the course of the quarter to 592 billion euros from 621.5 billion euros at the end of 2022. The bank said the decline was “driven by increased price competition, normalization from elevated levels in the prior two quarters and market volatility at the end of the quarter.

Deutsche’s corporate bank net revenues came in at 2 billion for the quarter, up 35% year-on-year and the highest quarterly figure since the launch of its transformation program. Net interest income was the main driver, growing 71%.

However, the bank also flagged job cuts for non-client facing staff and reported a sharper-than-expected 19% year-on-year fall in investment bank revenues year-on-year.
“The bank is currently implementing additional efficiency measures across the front office and infrastructure,” it said in the report.
“These include strict limitations on hiring in non-client facing areas, focused reductions in management layers, streamlining the mortgage platform and further downsizing of the technology centre in Russia.”
Other data highlights for the quarter:

Revenues came in at 7.7 billion euros, up from 7.33 billion euros in the first quarter of 2022, despite what the bank called “challenging conditions in financial markets” during the quarter.
Provision for credit losses stood at 372 million euros, compared to 292 million euros a year ago.
CET 1 capital ratio, a measure of bank solvency, stood at 13.6%, up from 12.8% a year ago an 13.4% the previous quarter.

The beat on earnings expectations follows a 1.8 billion euro net profit for the final quarter of 2022, which vastly outstripped expectations and brought the bank’s annual net income to 5 billion euros. However, uncertainty around the macroeconomic outlook, along with weaker-than-expected investment bank performance, kept traders cautious on the company’s stock.
The market turmoil triggered by the collapse of U.S.-based Silicon Valley Bank in early March, which eventually resulted in the emergency rescue of Credit Suisse by UBS, briefly engulfed Deutsche Bank late last month despite its strong financial position.
Its Frankfurt-listed stock plummeted, while credit default swaps — a form of insurance for a company’s bondholders against its default — soared, prompting German Chancellor Olaf Scholz to publicly dispel market concerns.
‘Natural beneficiary’ of Credit Suisse demise
CFO James von Moltke told CNBC on Thursday that the March banking turmoil had enabled the bank to prove its mettle to a skeptical market.
“It was an interesting market environment in March, for sure. We were tested, and I think the silver lining of the test is we passed, and I think we passed with flying colors,” he said.
“The market was looking for vulnerabilities in banks with this surprise out of the U.S. regional banking sector. It was looking for securities losses, interest rate mismanagement issues, commercial real estate exposures, and many other sort of features.”
He suggested that, in scrutinizing Deutsche Bank, market participants saw a strong and profitable business model, stable balance sheet and deposit base, a “very moderate” and “well underwritten” commercial real estate book and “no near-term financing needs.”

“So across the various dimensions, when the market took a good look at us, what they saw was a stable, well-run well-risk managed bank,” von Moltke told CNBC’s Annette Weisbach.
In light of the emergency rescue of Credit Suisse by UBS, von Moltke also suggested that Deutsche Bank would be a “natural beneficiary of fallout” from the stricken Swiss lender’s demise.
“We admire the management team at UBS and we think that that competitor will be formidable with the passage of time but equally, a concentration of the banking relationships with now one provider for many of their clients is something that you’ expect to see them diversify,” he said.
“And we think we’re a natural destination for some of their clients, some of their people, some of the business, and I think we’re well-positioned to profit from that opportunity.” More