DBK Deutsche Bank AG

By Patricia Kowsmann 

Deutsche Bank AG weathered the first weeks of the coronavirus pandemic better than expected as customers rushed to reposition their investments, boosting the German bank's investment-banking revenue.

But the bank warned a sharp slowdown in the global economy will hurt its loan book, and possibly its ability to sell unwanted assets.

Deutsche Bank said it has set aside EUR506 million ($547 million) to cover credit losses, including EUR260 million directly related to the virus. It said its liquidity reserves dropped 8% to EUR205 billion in the quarter due to heavy client drawdowns on committed credit facilities. The bank said it is still EUR43 billion above regulatory requirements. The capital cushion it has to absorb future losses is also shrinking. Building it back up will be difficult.

"This changed environment will impact Deutsche Bank's results of operations, capital ratios and the capital plan that underlies our targets," the bank said in a statement.

It said revenue is expected to be slightly lower in 2020 compared with last year, adding the outperformance in the first quarter is offset by lowered expectations later in the year. Provisions for credit losses, it said, are expected to increase significantly from low levels.

The Frankfurt-based bank earlier this week disclosed its profit for the three months ended March 31 fell 67% to EUR66 million, from EUR201 million a year ago. The results, however, beat analysts' expectations, thanks to a higher-than-expected revenue of EUR6.35 billion. Compared with the year-ago period, revenue was flat. Shares in the bank soared after the announcement. Despite the bank's shares falling 7% this year, it is still one of the best performers among European lenders.

On Wednesday, the bank provided details behind those figures as it officially reported its financial performance for the quarter. It said revenue in its investment-banking business rose 18% from a year-ago period to EUR2.3 billion. Its fixed-income trading business did particularly well, as customers shifted their assets around to better weather the virus storm, resulting in big fees and commissions. Revenue at its corporate bank unit, which caters to clients like midsize German companies, fell 1%. It rose 2% at its private and retail banking.

Mark Fedorcik, head of the investment bank, said the unit was doing well before the virus spread in Europe in March, with revenue growth and market-share gains. Once the virus hit Europe and the U.S., he said corporate clients focused on getting liquidity through credit lines, issuance of debt in the markets and in some cases loan waivers. Institutional investors, meanwhile, repositioned their investment portfolios based on their risk appetite.

"We are seeing some fixed-income markets normalize and stabilize as we move to the end of April," Ram Nayak, head of fixed income, said.

The bank remained on track with its cost-cutting drive, a key part of a plan it launched last year meant to make it a leaner and profitable bank focused on European companies and retail-banking customers. Deutsche Bank reported costs fell 5% in the first quarter.

Controlling costs is key for Deutsche Bank and other European lenders given low and negative interest rates across the region making it difficult to make money. Germany's banking system is also the least profitable in the eurozone due to its overcrowded market of more than 1,500 banks. Adding to the bank's woes is a massive portfolio of unwanted assets, including derivatives, that it piled up over several years of risky bets and that it is now trying to sell or wind down. Excluding that unit, the bank said it expects revenue to be flat this year.

Dealing with both cutting costs and controlling risk has become even more challenging because of the coronavirus pandemic.

It could be difficult for the bank to continue slashing jobs in Germany as the country enters what is expected to be a deep recession. Mr. Sewing has promised to cut 18,000 of its approximately 92,000 jobs by 2022. Last month, the bank paused layoffs until some stability returns.

The risk in its loan portfolio is also rising, as borrowers begin to struggle with the downturn. Germany's gross domestic product is expected to shrink 7% this year, according to the International Monetary Fund. The EUR506 million the bank has set aside to cover credit losses is lower compared to U.S. peers, whose profitability is much higher. But James von Moltke, Deutsche Bank's financial chief, said he is comfortable with the quality of its loan portfolio.

Investors are also paying close attention to the bank's capital cushion to absorb future losses. Earlier this week, the bank said because it was boosting lending to customers in need, its capital-buffer ratio -- known as CET1 -- could "modestly and temporarily" fall below its target of at least 12.5%. It was 12.8% at the end of the quarter.

While still higher than the 10.4% regulatory minimum, analysts say building the capital back up could be a challenge for the bank. For one, shareholders may have little appetite to put more money into a bank whose shares have been trading at historic lows since last year.

"Deutsche Bank should try to maintain CET1 close to its previous target of 12.5% for the market to remain comfortable in the current challenging macro environment," JP Morgan analyst Kian Abouhossein said.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com

(END) Dow Jones Newswires

April 29, 2020 03:19 ET (07:19 GMT)

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