(Bloomberg) -- Deutsche Bank AG (DE:DBKGn) said lower interest rates will increase pressure on revenue after its trading slump deepened in the second quarter, adding urgency to Chief Executive Officer Christian Sewing’s overhaul plans.
The bank again underperformed Wall Street peers in trading, with income from buying and selling securities slumping 12%, led by a decline of about a third in the equities business. The bottom line result was also worse than expected after the bank booked a 3.4 billion euro restructuring charge.
Shares of the lender slumped in early trading as Chief Financial Officer James von Moltke suggested the outlook for lower rates could complicate the turnaround. Sewing this month unveiled the biggest cutbacks yet to the investment bank, including the wholesale exit from equities trading. Speculation about the future of the unit compounded the impact of Wall Street’s worst first half for securities trading in a decade.
“Frankly it does represent a revenue pressure for us and all of the banks if rates from here go down further,” von Moltke said in an interview with Bloomberg Television. “It’s something that, as you say, is a significant risk to us.”
Deutsche Bank fell 5.2% at 9:22 a.m. in Frankfurt trading, the worst performer among the large European lenders.
‘Very Aware’
Von Moltke said earlier this month that the goal of lifting return on tangible equity to 8% in 2022 “is realistic given the interest rate environment we’re facing.” The bank wants to boost its annual revenue by 2 billion euros through 2022, helped by a “modest improvement” in rates.
“We provided a set of numbers,” von Moltke said on Wednesday. “As one always does, one has to make some planning assumptions, those happened to be at the end of May and we are very aware that the outlook deteriorated during June.”
He said that if the European Central Bank does lower rates, he expects it to shield commercial banks from further harm through deposit tiering, in which some overnight deposits that banks park at the ECB are excluded or charged a less punitive rate.
“Client retention risks, an unfavorable interest rate environment and negative secular trends across divisions present material headwinds to management plans,” Thomas Hallett, bank analyst at Keefe, Bruyette & Woods in London, wrote in a note. “These results do little to allay market concerns on the ability to deliver on those targets.”
Deutsche Bank bank booked 3.4 billion euros ($3.8 billion) of restructuring charges in the second quarter, more than it had guided, resulting in a 3.2 billion-euro net loss for the second quarter. It previously said it expected a net loss of around 2.8 billion euros. Adjusting for the charges, net income would have been 231 million euros, higher than the bank had indicated when it announced the restructuring.
Deutsche Bank’s trading result in the second quarter compares with a decline of around 8% at the five biggest Wall Street banks. UBS Group AG on Tuesday reported a 9% slump in equities trading and 7% lower revenue from fixed income.
Deutsche Bank said it started losing business during the quarter as it became clear it would exit equities trading. Sergio Ermotti, the UBS CEO, said Tuesday that some of the balances from the German lender’s business are coming to his bank’s prime brokerage unit.
Fixed income trading, a traditional strength of Deutsche Bank, declined 11% when adjusting for a one-time item, the bank said. Sewing is keeping that business, while reducing the amount of capital it uses.
As part of its exit from equities, the German lender had agreed to transfer some 150 billion euros of balances linked to hedge funds to French rival BNP Paribas (PA:BNPP) SA, but clients have been pulling about $1 billion of funds per day and going elsewhere as the firms iron out the details, people familiar with the matter have said. Deutsche Bank is planning to auction its equity derivatives portfolio and kick off the process in the coming weeks, a person familiar with the matter said.
At the global transaction bank, which Sewing is separating from the investment bank to make it the centerpiece of a new corporate bank division headed by Stefan Hoops, revenue was essentially flat when adjusting for a one-time gain a year earlier.
The German lender’s overhaul resulted in the departure of investment banking head Garth Ritchie. Sewing has taken over oversight over the division at the management board level while operational oversight has been split between Hoops; Mark Fedorcik, head of the investment bank; and Ram Nayak, in charge of fixed-income trading. Christiana Riley, who’s running the bank’s U.S. operations, will join the management board pending regulatory approval.
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