Deutsche Bank Plunges After Jump In CRE Loss Reserves, Shelves Plans For Buyback

After a seemingly endless streak of stronger than expected earnings reports, this morning Deutsche Bank posted its first quarterly loss in four years as revenue from fixed-income and currencies fell about 3%, trailing the average 5% gain on Wall Street (even as IB income rose about 10%).

Also, the bank's decision set put aside a bigger loss reserve for souring loans to companies and the commercial real estate sector did not help, and cast a shadow over an otherwise solid quarter for several of Europe’s largest lenders.

Deutsche Bank’s quarterly loss, a €143 million shortfall in profit attributable to shareholders, was the first since the second quarter of 2020, when it began to emerge from the restructuring kicked off by Sewing in the previous year. Last quarter’s figure included a €1.3 billion litigation provision tied to its Postbank retail unit.

More importantly, as a result of the earnings fiasco, Germany’s largest bank also shelved plans for a second buyback this year as a previously disclosed litigation charge pushed it to the first quarterly loss since 2020. The shares plunged as much as 8.5% Wednesday, the steepest drop in almost three months, as the market realized it will no longer be frontrunning stock buying by the bank itself. They since recovered some losses, and were down 5.6% at last check, the worst performer among the large European lenders. BNP and UniCredit declined as well, with only Santander posting gains.

"The beginning of a recovery that I might have expected three months ago hasn’t happened yet," Chief Financial Officer James von Moltke said on an analyst call, referring to the lender’s exposure to commercial property loans.

According to Bloomberg, the disappointing results from Deutsche Bank dented optimism about lenders across the region, sending a broader index of European banks lower even as Italy’s UniCredit SpA and Spain’s Banco Santander SA both raised their revenue guidance. France’s BNP Paribas SA beat the profit estimate from analysts after it reported a 57% jump in equities trading. Santander raised its target for revenue growth this year and said it would continue to focus on controlling costs after posting a record profit in the second quarter. The bank’s key retail business was boosted in the quarter by its two main markets, Spain and Brazil.

By contrast, investors were disappointed with BNP Paribas despite the profit beat. The French bank posted a decline in fixed-income trading revenue that compared with an average gain for the US competition. The equities business was the biggest positive surprise at the Paris-based lender, highlighting how a strategy to build the unit out over the past years is paying off. BNP bought a part of Deutsche Bank’s equities business several years ago when the German bank put it on the market as part of a large-scale turnaround strategy.

Despite the unexpected crunch for Deutsche Bank in the second quarter, the bank said it remains positioned to exceed a pledge for €8 billion in shareholder payouts over the "medium term." CEO Christian Sewing also reiterated targets for higher profitability and revenue of €30 billion this year as he cuts back office costs.

Sewing has built out the advisory unit with last year’s purchase of Numis Corp. to boost fee income. Deutsche Bank is also one of the few lenders that has chosen to take advantage of a downturn in dealmaking to add staff to its M&A unit, which saw a strong rebound in revenue during the quarter.

The firm is also among a dozen lenders in the focus of the ECB over risks from leveraged finance, i.e., extending credit to companies that are already highly indebted. The ECB is considering asking banks to set aside about €7 billion in additional provisions for such debt, Bloomberg reported on Tuesday. Sewing and von Moltke both said they were confident that Deutsche Bank has made adequate provisions for the leveraged finance business.

DB's full earnings presentation can be found here.