Deutsche Bank’s profit miss isn’t temporary hiccup
By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Anshu Jain and Juergen Fitschen are having a baptism of fire. Investors had been hoping the new Deutsche Bank co-chief executives would unveil roughly 1 billion euros of second-quarter net income when they present the group’s first results under their leadership next week. Instead, the numbers have come early and it’s not good news.
Deutsche’s net income for the period will be only 700 million euros, 42 percent below the same quarter last year. The main culprit looks to be its operating cost base, which has risen to 6.6 billion euros compared to 6.3 billion euros in the second quarter of 2011.
The expense inflation is to an extent an issue peculiar to Deutsche. A big part of the bank’s costs are booked in dollars or sterling, currencies that lately gained against the euro, in which results are reported. Deutsche’s failure to better hedge this risk is slightly embarrassing, given its market-leading position in foreign exchange.
Currency woes may have been exacerbated by revenue weakness. Investment banks in general probably saw revenue in core areas like rates, foreign exchange and credit fall by 5 percent to 10 percent quarter on quarter. Deutsche has yet to reveal how it fared, but it probably did no better.
The wider problem for Jain and Fitschen is that they can’t easily shrug off these revenue and cost challenges. Continuing macroeconomic gloom means weaker client activity in bond and equity issuance, while the ongoing euro zone mess will continue to hurt Deutsche’s reporting currency, which seems to have established a firm downward trend.
It is surprising then that Deutsche still looks behind the pack in its moves to reduce its investment banking headcount. Even allowing for an additional 1,000 jobs likely to be cut, Deutsche is being less aggressive than competitors like Credit Suisse or Morgan Stanley.
Worse, Deutsche is a capital laggard too. While the bank says its core Tier 1 ratio remains above 10 percent, on a Basel III basis it is around 7 percent, below many peers.
Jain’s strategy, like that of Bob Diamond, the recently departed Barclays boss, looks to depend on the investment banking slowdown being cyclical, not structural. That view may be difficult to sustain in the second half of 2012.