The Q2 results from Deutsche Bank are a bit strange to read, because they’re an account of a business that doesn’t really exist any more after the strategic transformation announced two weeks ago. For the record, the investment banking revenues (excluding global transaction banking) were down 10% on Q1 19 and 29% on the same quarter last year.
Perhaps more worrying for Deutsche Bank, the transaction banking revenues were also down 6% on Q2 18, or in the language of earnings releases, “essentially flat”, when adjusted for a disposal. The super-aggressive Stefan Hoops has promised to raise transaction banking revenues to €5bn over the next two and a half years. That target has always looked optimistic and doesn’t appear to be on track.
In the investment banking lines affected by the transformation, things were bad. Equities sales and trading revenues were down 32% compared with last year. Deutsche attributes this to “lower client flows due to the market’s anticipation of a strategic downsizing”. Strangely, though, this miasma of pessimism didn’t seem to affect the rates franchise at all, even though it is also scheduled for significant reductions.
The overall FICC trading revenues were down 11% excluding Tradeweb gains, which is a bit worse than the average of the big US banks and UBS, but not as bad as Goldman Sachs, and within that, rates were singled out for a “solid performance”. Perhaps rates clients are just less squeamish than equities clients when it comes to placing an order with somebody they think is going to be made redundant. The capital markets lines (ECM down 30%, DCM down 24%) and the advisory revenues (down 41%) seem to have been affected almost as badly as the divisions getting cut.
With regard to the redundancies, it looks like we’ve got further confirmation that packages are going to be on the mean side. Having taken €3.4bn of restructuring charges in Q2 (mainly writedowns of tax assets and software), Deutsche now expects to take an incremental €2.3bn for the 18,000 redundancies expected in the strategic package (900 of which have already been made or notified).
Even if we assume that the whole €2.3bn relates to severance costs, that’s €128k per head, considerably less generous than the €177k that was baked into assumptions in last year’s round of redundancies, which were themselves by no means lavish.
The bank also confirms that the transfer of prime brokerage assets and people to BNP Paribas is progressing slowly, and that as a result of this, the promised reduction in leverage and assets might be in the 2020 accounts rather than the 2019. It also leaves us with a bit of a puzzle.
There’s a proforma breakdown of revenues under the new divisional structure on page 77 of the accounts showing that the “Capital Release Unit” would have had €2bn of revenue in it. But slide 21 of the presentation on the strategic transformation from 8 July had €2.5bn in this division. Has there been a reprieve for €500m of investment banking businesses? The precise reason why €500m of revenue has been transferred from the bad bank to the good bank was not wholly made clear from the bank’s conference call with analysts earlier today, but apparently it relates to "refinements and fine tuning to the modelling of the core product capabilities", and nobody has got a reprieve.
CEO Christian Sewing was also keen to emphasise during the call that Deutsche has made senior hires in capital markets and advisory, and he said that he expected the bank to gain market share next year as the new recruits began to deliver.
James von Moltke, for his part, drew attention to the high-level hires that Deutsche has made in Global Wealth Management, and in particular the initiative targeting family offices and ultra-high net worth clients. So although there are large job losses coming, and Deutsche aims to have all the restructuring costs taken this year, the firm is still hiring in the businesses they want to keep – and hoping for results.
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