According to the news report by Bloomberg, German lender Deutsche Bank AG surprised markets after it announced better-than-expected preliminary performance results. However, how good the earnings results actually are will be revealed when the full results are announced later this month on July 25.
However, currently, it seems that most of the bank’s gains came from one-off items. Trading income, on the other hand, dropped sharply in the second quarter of 2018. This fact alone make the market doubt Deutsche Bank’s assertion that its preliminary figures demonstrate its resilience.
According to Independent Research analyst Markus Riesselmann, while the entire picture is not yet clear, what is known seems to indicate that the numbers are coming in from widening credit spreads, which is not a performance that can be sustained. He went on to say that from the numbers the bank shared, it seems that trading numbers have fallen, which means that Deutsche Bank has still got a long way to go on its road to recovery.
Despite market skepticism, the surprise report has been a rare piece of good news for a company that has been bombarded with only bad news for the last few months. The bank has been struggling with its shares trading at record lows, a turbulent top management shuffle as well as its 4th strategic restructuring in four years.
Deutsche Bank’s new Chief Executive Officer Christian Sewing is now cutting jobs in the thousands to cut costs. Another cost cutting measure that he is taking is removing non-profitable businesses in the US and Asia after a recent attempt to restore them failed.
Deutsche Bank’s share prices went up by 7.3% after the news about its preliminary earnings was released, bringing down the lender’s losses to about 35% for the year so far. Prior to this new, the German bank was the worst performing company in Europe for the year so far.
According to the preliminary report, Deutsche Bank expects to report a Q2 net income of €400 million (~$468 million), which is a 14% drop from the same time a year ago. However, it more than the target market expectation of €159 million (~$185.38 million). The bank’s revenue is expected to be about the same at Q2 of 2017 – about €6.6 billion (~$7.69 billion). The lender had previously forecast a lower revenue expectation.
Other things that were lower than expected were the litigation as well as restructuring costs. These are also one-time expenses.
The corporate and investment banking division seems to have accounted for the majority of the good results. However, that revenue also included a €100 million gain due to the sale of an asset as well as debt evaluation adjustments. The down side is that both these credits are one-off effects and don’t really show the banking unit’s actual performance.
Another piece of good news was that the German bank seemed to have kept its market share in its advisory business for acquisitions and originations as revenue in that segment went up by 2%.
The bad news in the preliminary report is that the bank’s trading revenue was down by 15% from the same time a year ago, which is well below the market expectation of a 10% drop. This makes it the 5th successive quarterly decline for the trading business. This performance is also worse than what the major US investment banks have reported for Q2 so far.
Ironically, debt valuation adjustments are an accounting oddity that will boost earnings when the spreads on a bank’s bonds increase. This is actually an indication of increasing skepticism among investors.