Deutsche Bank CEO says 2021 i-bank revenues may reach 2020 high after strong Q1

Based on its strong first-quarter results, Deutsche Bank AG should be able to keep 2021 investment bank revenues very close to the record level achieved in 2020, CEO Christian Sewing said April 28.

"We continue to expect markets to normalize in the remainder of 2021, but we feel reassured in our view that a substantial portion of our investment bank growth since 2019 is sustainable," Sewing said during a first-quarter earnings presentation.

Thanks mainly to a 32% year-over-year increase in investment bank revenues, Deutsche Bank's total first-quarter revenue grew by 12% to €7.23 billion. Combined with lower credit loss provisions and adjusted costs, the revenue boost helped the German group swing to an attributable profit of €908 million from a year-ago loss of €43 million, booking its best quarterly figures in seven years.

The market cheered the strong earnings, sending Deutsche Bank's share price up more than 10% on April 28.

Deutsche Bank's first-quarter results "underscore its improving resilience," Giles Edwards, senior financial services ratings director at S&P Global Ratings, said in an April 28 note. "While buoyed by cyclical investment banking revenues, the underlying trends are consistent with the improvements" which prompted S&P Global Ratings to upgrade its outlook on Deutsche Bank to "positive" in February, Giles said. The group's "more efficient, focused, and well-controlled business and operating model should deliver the operating and franchise stability and sustainable, predictable performance that the bank has lacked since 2014," he added.

The strong results in the investment bank and asset management divisions, coupled with stability in the domestic businesses, have propelled Deutsche Bank's profitability to a new level as adjusted return on tangible equity for the first quarter reached 7.4%, almost meeting the group's 2022 ROTE target of 8%, Moody's credit analyst Michael Rohr said in a written comment.

Revenues

In the first quarter, the investment bank continued to benefit from its refocused business model, with further growth in fixed income and currencies trading and market share gains in origination and advisory, Sewing said. The unit's revenues for the period rose to €3.10 billion from €2.35 billion in the first quarter of 2020. Based on the strong performance, 2021 investment bank revenues should remain at, or very close to, the €9.3 billion high booked in 2020, the CEO said.

The first quarter was defined by strong performance in the credit business, CFO James von Moltke said. The recovery in credit was stronger than anticipated, while there was normalization in the macro businesses, in rates and in foreign exchange, Sewing said. However, the general trend showed underlying sustainability in investment bank revenues across products, the CEO added. The momentum and good client engagement support the group's assessment that the FIC trading business has been stabilized and has even started to grow, Sewing said.

Given the current "robustness and sustainability of revenues" in the investment bank, management's confidence that the unit will achieve the targeted €8.5 billion annual revenues in 2022 "is even higher than before," the CEO noted.

Group revenues are also headed towards hitting the 2022 strategic goal of €24.4 billion despite interest rate headwinds, especially in the corporate and private bank segments. "All our core businesses have proven the strength of their franchises, putting our 2022 objectives well within reach," Sewing said. The corporate bank is currently offsetting negative interest rate effects by portfolio repricing and the private bank aims to counter those effects through further business growth, the CEO said.

Dividend

Deutsche Bank has made a good start towards reaching its long-term distribution goals with a dividend accrual of €300 million in the first quarter, von Moltke said. As the group does not plan distribution before 2022, it is too early to comment on the specific amount of the dividend or whether there will be a share buyback, according to the CFO.

The dividend accrual on common shares is "relatively mechanical" and stands at 33% of annual net income after accrual for coupons on Additional Tier 1 instruments, which typically runs at €100 million per quarter, von Moltke said.

Nevertheless, the already accrued amount gives Deutsche Bank some flexibility when deciding about the size and mix of distributions, which it plans to start from next year. "The nice thing is to exit the first quarter with the €300 million on the books ... We're pleased that we've set a milestone here," the CFO said.

Costs

Deutsche Bank continued its downward cost trajectory for the 13th consecutive quarter and cut adjusted costs by 2% year over year to €4.6 billion in the first three months of 2021, the executives said.

However, the group had to book €600 million in bank levy charges, €300 million more than initially planned, due to the increased target size of the European Single Resolution Fund, Sewing said. Banks' contributions to German deposit protections schemes have also increased in the wake of the Greensill Bank AG insolvency, which led to additional costs in the first quarter and is expected to affect costs in the coming quarters as well, according to Deutsche Bank.

"We expect this incremental contribution to be roughly €70 million in 2021 and approximately €60 million per year thereafter until 2024," von Moltke said.

Management does not think it is "sensible" to offset these expenses, which are out of its control, through additional cost cuts in the near term "because we think we would starve the company of necessary long-term investment capacity, especially in things like regulatory remediation, control remediation, technology improvements," von Moltke said. "However, we believe it is too early to adjust our cost expectation of €16.7 billion for 2022," the CFO noted.

Baseline costs in 2021 are anticipated to be €400 million higher than the previously announced target of €18.5 billion but the bank expects "to more than offset" the effect with stronger-than-expected revenue performance, von Moltke said.

The implemented management and structural changes, such as the integration of operations, will result in further efficiencies, Sewing said. The group will continue to focus on cost discipline, which has helped it keep expenses under control in the past three years, the CEO noted.