Deutsche Bank: market will enforce a lower reliance on investment banking

If this year’s rally in European equity prices implies optimism about the region’s economy, Christian Sewing was having none of it. Deutsche Bank’s chief executive unveiled annual profits of €5.6bn on Thursday, its highest in more than a decade. But Sewing instead grumbled about the outlook for the bank, concerned about volatility and uncertainty.

Sewing wants to lower the bank’s reliance on an unpredictable investment bank. Its erratic earnings path gets part of the blame for a market value which persistently trades well below tangible book value, currently only 40 per cent. Sadly, that measure is only slightly above the five-year average.

His downbeat assessment only partly explains why Deutsche Bank’s shares fell on the day. A widely expected cash return from a new buyback did not materialise. Shareholders might ask why given about €3.1bn of excess common equity tier one capital, over management’s target. Regulators are probably hesitant to sign off on any new buybacks in the face of an economic slowdown.

There was relative weakness in the final calendar quarter in its fixed income and currency (FICC) team revenues. These rose 27 per cent year on year, below US peers. Goldman, for example, increased its FICC revenues by 44 per cent. A drought of fundraisings meant fees from debt and equity originations for Deutsche fell 76 per cent full year.

A bright spot gleamed in corporate banking, with 23 per cent of group top-line the most since at least 2016. Here better loan pricing made a difference. Regardless of Sewing’s outlook, this segment revealed Germany’s economic resilience last year.

Meanwhile, its deposit rates for savers, including corporates, remain well behind those for loans. Deposit beta in Germany — the share of higher rates passed on — at 8 per cent is below the European average of 13 per cent. That has bolstered its net interest margins.

Yet Deutsche’s net interest margins have rarely remained above the current 1.5 per cent level for long. That leaves Sewing with another problem, non-investment bank revenues are vulnerable to disappointments too.