Despite increased risks related to the COVID-19 pandemic, Deutsche Bank AG does not expect to see 2020 credit losses reach the level they did during the global financial crisis, CEO Christian Sewing said April 29.
The German banks booked loan loss provisions of €506 million for the first quarter, equivalent to 44 basis points of loans, up from 31 basis points a year ago, and expected full-year provisions of 35 basis points to 45 basis points.
"We expect the majority of these provisions to be taken in the first half of 2020 with a normalization later in the year. This reflects our expectations of the macroeconomic impact from COVID-19 including the effect of the government support programs," Sewing told analysts at an earnings presentation.
With a small profit of €66 million and flat year-over-year revenues of €6.35 billion, the report was received well on the market even though Deutsche Bank scrapped most of its 2020 financial targets. Its share price surged more than 11%, breaching the €7 mark at close.
There are three main reasons why Deutsche Bank and many of its peers will not see provisions at 2008 levels this year, Sewing said.
Banks' balance sheets hold less risk and more capital and their clients' operational resilience is higher than at the onset of the global financial crisis, he said. Furthermore, there are government programs that provide immediate liquidity support and measures in place to address the long-term solvency issues of corporates, he said.
Deutsche Bank, in particular, has learned its lesson from the last crisis in terms of concentration risk in its portfolio and now does a better job in terms of active hedging, the CEO said. Therefore, the projected level of provisions this year is achievable, he said.
The industries hit hardest by the COVID-19 pandemic and the oil market turmoil, including aviation, leisure, oil, and gas, commercial real estate, and retail, excluding food, account for roughly 11% of the group's total loan book, the bank said.
Nevertheless, to absorb the added losses and continue with its ongoing restructuring, Deutsche Bank will need more capital and will not be able to meet its previous common equity Tier 1 ratio and leverage ratio targets for 2020. While CET1 ratio is expected to drop below the target of at least 12.5% only temporarily by the end of 2020, the leverage ratio target for the year is out of reach, according to CFO James von Moltke.
"Assuming no change in the definition for leverage exposure, for example, to include cash, government securities, and government-guaranteed lending, we are now unlikely to reach our fully loaded leverage ratio target of 4.5% in 2020," he told analysts.
The group has also revised its revenue outlook, now expecting the 2020 result might be slightly below the 2019 level.
However, Sewing remained positive on full-year revenues saying there is "a lot of resilience" in the franchise and Deutsche Bank may be able to grab some market share in Germany as it has become "the go-to place" for both corporate and private clients in its home market.
The investment bank unit, which booked an 18% jump in first-quarter revenues to €2.34 billion, is expected to contribute to the group's annual total as well. Based on the first four months, even with the expected lower figures over the coming quarters, investment bank revenues should stay flat year over year in 2020, he said.
Over time as the environment normalizes, Deutsche Bank expects it will be able to reach all its medium-term targets, including a CET1 ratio of at least 12.5% and a leverage ratio of around 5% by 2022, von Moltke said. The CFO even reaffirmed the target for an after-tax return on tangible equity of 8% by 2022.
"We are operating in a highly unpredictable environment but at this stage we see no reason to change [that target]," von Moltke said, noting that "the largest driver of our improved returns will come from cost reductions."
Indeed, the only 2020 target Deutsche Bank decided to keep was the €19.5 billion in adjusted costs, down from €21.5 billion in 2019. By 2022, the group aims to reduce costs to €17 billion mainly through 18,000 job cuts.
Both Sewing and von Moltke said the group continues to execute its restructuring as initially planned. Talks with the works council have not been impeded by the pandemic, Sewing said. Beyond the personnel cuts, Deutsche Bank will actively seek further opportunities to reduce costs, also in areas such as corporate travel or real estate, he said.
"We will change the way we are working and we have further ammunition to reduce our costs," Sewing said.