Deutsche Bank AG generated more revenue than expected in the first quarter, posted a surprise profit and said it will temporarily slip below a key target for financial strength during the coronavirus pandemic.
In a statement overnight, the Frankfurt-based lender said it expects to report pretax profit of 206 million euros ($223 million) and net income of 66 million euros, defying analysts’ predictions for losses. Revenue amounted to about 6.4 billion euros, beating the 5.7 billion-euro average estimate compiled by Bloomberg.
“We may modestly and temporarily dip below our target” for a common equity Tier 1 ratio of at least 12.5%, the bank said. It will keep working toward that goal for 2022. Deutsche Bank’s early report — full details remain scheduled for April 29 — suggests the lender may have joined Wall Street peers in benefiting from a surge in client trading amid violent market swings. The firm said that, like rivals, it’s trying to provide embattled businesses with additional financing that could increase risk-weighted assets in the months ahead.
“Many of our clients are facing great challenges from Covid-19 and they need our support now,” the company said in a separate statement on its website. “We aim to support them with our strong balance sheet, while always remaining within regulatory requirements.”
Chief Executive Officer Christian Sewing has been trying to reassure stakeholders that the firm, which has suffered five straight years of annual losses, is entering the crisis stronger than it’s been in a long time. He’s refocusing the bank on its traditional strength of financing Germany’s exporters. Yet it has continued to carry one of the largest piles of hard-to-value holdings among peers.
Since the coronavirus spread, European regulators have raced to give relief to financial firms, reducing capital buffers and easing trading regulations to encourage lending to struggling companies. Deutsche Bank said the moves are giving it “additional headroom.”
Its CET 1 ratio of 12.8% at the end of the quarter was down from 13.6% as of Dec. 31, but still above the European Central Bank’s current requirement of 10.4%, according to the company. The firm said it may also miss a leverage ratio target this year unless regulatory changes improve its reported figure.
The lender stuck to its goal for an 8% after-tax return on tangible equity at the end of 2022. Meanwhile, it may further adjust some nearer-term guidance. “In anticipation of business opportunities and elevated client demand and in light of the current macroeconomic environment, Deutsche Bank is reviewing its 2020 CET1 and leverage ratio targets,” the bank said.
Deutsche Bank followed Switzerland’s Credit Suisse Group AG and Italy’s UniCredit SpA, as well as peers across the Atlantic including JPMorgan Chase & Co. and Wells Fargo & Co., in setting aside money to cover souring loans as the pandemic slows commerce.
The German bank expects non-interest expenses to be 5.6 billion euros in the first quarter, while provisions for credit losses were probably about 500 million euros.
“This extraordinary economic environment suggests that we will see a higher level of credit defaults,” the firm said. “Nevertheless, Deutsche Bank’s loan book is of high quality and well diversified.”
Before the announcement, Bloomberg Intelligence was expecting the firm to generate a Europe-leading $1.86 billion in trading from fixed income, currencies and commodities. The bank has yet to break out those numbers.
Sewing announced plans last summer to cut almost 18,000 jobs over the next three years as part of a huge restructuring to restore the bank to profitability. In March, the bank put plans for large-scale reductions on hold because of the outbreak.
The surprise profit may at least provide temporary relief to shareholders, who’ve been nursing losses without the cushion of a dividend payment.
The stock, which hit a record low last month, has fallen 21% this year. Compared with global peers, Deutsche Bank’s price-to-book ratio is lagging well behind.
— With assistance by Matthew G Miller, and James L