Lagging behind Why Deutsche Bank’s 2017 loss was so surprising

Deutsche Bank reported a €497-million loss on Friday, marking its third consecutive year in the red. Wrong-footed shareholders are wondering about CEO John Cryan’s direction - and his longevity.
In for the long haul, if he keeps his job.

Sluggish markets, stubbornly high costs and tepid returns from investment banking teamed up to surprise Deutsche Bank’s investors on Friday, as the bank posted its third consecutive loss in a row. The worse-than expected earnings prompted some investors to question whether John Cryan, its CEO, should be given more time to turn Germany’s biggest bank around.

The bank reported a net loss of €497 million, or $620 million, for 2017. On the Frankfurt Stock Exchange, investors in Germany’s largest financial institution left no doubt as to what they thought of Deutsche Bank’s figures. The stock price skidded as much as 6 percent lower, as the German stock market suffered its worst week since last August.

The stock sell-off came as independent profit forecasts proved to be badly off, not least due to Deutsche Bank’s own communications. Early last month, the bank said it had made a “slight loss” last year, blaming Donald Trump’s US tax reforms for pushing the results into the red during the fourth quarter. In the end, the annual loss was much worse than expected, as analysts had generally forecast a shortfall of no more than €300 million.

In a statement, Mr. Cryan defended his strategy and promised things would improve after several years of difficult restructuring. “We are firmly on the path to producing growth and higher returns with sustained discipline on costs and risks,” the 57-year old Briton said. “We have made progress, but we are not yet satisfied with our results."

I’m not seeing a clear strategy with Deutsche Bank. Hendrik Leber, fund manager at Acatis

During his tenure, Mr. Cryan has stabilized the bank, raised capital, designed an overhaul, confronted legal challenges and managed the demands of greater regulation. But shareholders are now airing their impatience. Hendrik Leber, a fund manager with German investment firm Acatis, said Deutsche's plans looked uncertain. “With UBS, the direction was clear with its big restructuring,” Mr. Leber said. “I'm not seeing a clear strategy with Deutsche Bank.”

Before taxes, the bank earned €1.3 billion last year, again falling short of analysts’ expectations of around €1.9 billion. Nonetheless, the CEO expressed cautious optimism, pointing to the first pre-tax profit in three years despite a difficult market environment, low interest rates and continued investment in technology and control systems.

Investors remain annoyed that Deutsche Bank’s running costs are still high compared with other major banks. This year, the bank said it expected to trim costs by only 4 percent to €23 billion, above its previous target of €22 billion. Deutsche blamed delays in disposals, as its plans to pull out of operations in Spain, Portugal and Belgium did not get off the ground last year.

Last March, Deutsche announced it would integrate its Postbank retail bank unit into the parent’s own in-house consumer bank. On Friday, Mr. Cryan again urged investors to be patient. "It was always clear that this would take more than two or three years," he said. But the Postbank integration was “on schedule,” as were plans to partially float its asset-management unit “in the earliest available window.” Analysts are expecting the IPO will take place around Easter, and raise around €2 billion.

Like its US rivals, Deutsche Bank’s financial operations have been hit by slowing earnings from commissions and trading in stocks, bonds and currencies. In the fourth quarter of 2017 alone, profits from investment banking declined 16 percent to €2.7 billion, under the ballast of a 29 percent earnings drop in bond and currency trading and a 25 percent decrease for stock trading.

The US tax charges only served to highlight Deutsche Bank's lack of earning power.

Eliminations of American tax credits cost the bank some €1.4 billion in writedowns. Excluding this factor, the bank would have earned €900 million. The effect only served to highlight Deutsche Bank's lack of earning power, compared to its US rivals. In recent weeks, JP Morgan, Morgan Stanley, Citigroup and Goldman Sachs all announced billions worth of one-time charges due to the tax reform, but they all still retained a healthy bottom line. The largest US bank, JP Morgan, reported a near $2.5 billion writedown from the tax reform, but the charge barely left a scratch on its profits ($24.4 billion).

The fact that Mr. Cryan, despite the latest shortfall, still wants to pay his investment bankers significantly higher bonuses for 2017 has stoked indignation among stockholders and the broader public. Marcus Schenck, a board member who co-leads the investment banking division, defended the bonus policy, saying that Deutsche Bank paid below-average salaries on an international scale. “We’re still in the lower half if we compare with our competitors,” Mr. Schenck told those attending the the bank’s press conference on results on Friday in Frankfurt.

His boss seemed to agree. In a prepared speech, Mr. Cryan said "pay for our employees will be geared consistently with the business success of our bank." According to media reports, Deutsche Bank plans to pay bonuses of a billion euros for 2017, double the amount for the previous year.

In 2016, Deutsche made a loss of €1.4 billion, due in large part to penalties to US authorities for manipulating interbank lending rates. In 2015, the year Mr. Cryan took the helm, the bank reported a gaping shortfall of €6.8 billion – the worst in its 150-year history.

Yasmin Osman covers monetary policy and banks for Handelsblatt in Frankfurt. Jeremy Gray is an editor for Handelsblatt Global. To contact the authors: [email protected], [email protected].