Weak profits may prod Deutsche Bank to speed up restructuring

Agence France-Presse
'If the current weak economic environment persists, we will need to be yet more ambitious in the timing and intensity of our restructuring,' says CEO John Cryan

LOOMING RESTRUCTURING. A cash register sign can be seen near Deutsche Bank headquarters in Frankfurt, Germany on January 21, 2016. File photo by Arne Dedert/EPA

FRANKFURT, Germany – Deutsche Bank acknowledged on Wednesday, July 27, that it may be forced to push its restructuring faster, as it booked a 98% fall in profits in the second quarter.

Deutsche’s performance fell well short of the average of 188 million euros ($207 million) expected by analysts surveyed by Factset.

“If the current weak economic environment persists, we will need to be yet more ambitious in the timing and intensity of our restructuring,” chief executive John Cryan said in a statement released with the results.

Launched in October 2015 – just months after he took the CEO’s seat – the 54-year-old Briton’s “Strategy 2020” calls for 200 Deutsche branches to close in Germany and the slashing of 9,000 jobs worldwide.

By the end of this year, the bank hopes to have completed the sale of its stake in the Chinese Hua Xia bank as part of efforts to boost its capital ratio.

Cryan is battling to convince markets and regulators that Deutsche is on course for recovery after it was described as a “major systemic risk” by the International Monetary Fund in June.

Its share price has slumped this year, sapped by fears over Britain’s vote to quit the EU and weakness in the Italian banking sector.

The bank is battling almost 8,000 legal actions around the world, setting aside billions in recent years to cover judicial costs.

And in early July the US Federal Reserve revealed that Deutsche’s US arm had failed two sets of stress tests in a row.

Impatient shareholders

Cryan insisted on Wednesday that “even if our results show that we are undergoing a sustained restructuring, we are satisfied with the progress we are making.”

But shares in the bank plumbed losses in the region of 5% on the Frankfurt stock exchange on Wednesday, before recovering slightly as the day wore on.

Shares in the troubled lender have lost almost half their value since January 2016, standing at around 12.50 euros on Wednesday.

In May 2007, before the sub-prime mortgage crisis hit, shares were worth more than 100 euros.

May 2016, by contrast, saw angry shareholders berate managers over the almost 7-billion-euro loss ($7.7 billion) the bank posted for the year in 2015 at its AGM.

“This journey is demanding. It requires effort, but it will be worth that effort,” Cryan insisted back then.

Since then, fresh worries, including Britain’s surprise vote to quit the EU on June 23 and renewed fears over Italy’s banks, have been added to his in-tray – on top of the low interest rates and heavy restructuring costs that were already weighing on Deutsche.

“The outlook is therefore uncertain and that’s particularly true in the eurozone,” Cryan told a conference call early on Wednesday.

Some clouds clearing

While the bank faces daunting challenges, it has made progress in reducing some of its risks.

The bank reported a reduction in the second quarter in its stock of non-performing loans, which it hived off into a separate structure which finance director Marcus Schenck hopes to have wound up by the end of 2016.

Its bill for legal costs is also massively reduced, at 120 million euros in the second quarter of 2016 compared with 1.2 billion over the same period in 2015.

Cryan aims to have resolved 4 of the largest cases by the end of the year, including one regarding Deutsche’s dealings on the US mortgage-backed securities market before the financial crisis and another dealing with allegations of money laundering in Russia.

However, Schenck acknowledged that the bank has little control over how long it will take for the courts to reach judgements.

Meanwhile, the executives denied recent reports in the German press that Deutsche had given up on plans to float its Postbank retail banking subsidiary.

European Banking Authority stress test results – set for release on Friday, July 29 – will provide an initial indication of the Cryan strategy’s impact.

Observers may then be in a better position to judge the CEO’s insistence on Wednesday that fears over Deutsche’s stability are “unjustified.” – Rappler.com