Deutsche Bank warns on costs as inflation headwinds build

Deutsche Bank AG scrapped an efficiency target for the year, warning that a key profitability target is becoming increasingly difficult to achieve as the economy falters and the war in Ukraine, rising inflation and litigation spur spending.

The muted outlook, released alongside second-quarter results on Wednesday, overshadowed a strong performance in the corporate bank, which benefited from higher interest rates, and in fixed-income trading, which beat Wall Street in a volatile market.

Chief Executive Officer Christian Sewing has so far delivered on the key promise of his four-year turnaround plan, an 8 percent return on tangible equity this year. It has benefited from a year-long trade rally and more recently from rate hikes by the European Central Bank and the Federal Reserve. However, with the economy slowing, inflation showing no sign of easing and a host of other challenges mounting, the outlook for the remainder of the year has clouded over.

“We see some of the challenges ahead and have factored that into our outlook,” Chief Financial Officer James von Moltke said in an interview with Bloomberg TV. Deutsche Bank “had some setbacks in the first half that were beyond our control and we continue to see spending pressures in the second half of the year.”

Second-quarter pre-tax profit came in at €1.55 billion ($1.57 billion), well above analyst estimates of €1.39 billion. Deutsche Bank said it was the best second quarter since 2011.

At the corporate bank, higher interest rates drove net income up 26 percent to 1.6 billion euros, the highest since the unit was founded in 2019, when Sewing unveiled its restructuring plan. The private bank, which houses the lender’s retail stores, reported a 7 percent increase in revenue from a year earlier. Both companies struggled with the fallout from negative interest rates in Europe, which the ECB ended last week.

Fixed income trading, which fueled much of Deutsche Bank’s recovery under Sewing, rose 32 percent year over year, capping two years of market share gains. The top five U.S. investment banks, all of which released second-quarter results earlier this month, saw fixed income trading increase by an average of 31 percent.

At the same time, revenue from advising on deals and fundraising plummeted 63 percent year-on-year, prompting Deutsche Bank to lower its forecast for the investment bank, its top revenue driver. The lender said it now expects the unit’s revenue to be essentially flat this year, compared to a previous forecast of slightly higher sales.

Von Moltke was also more cautious about the trading environment, saying in the interview that “the market needs direction and it wasn’t as present in late June, early July as it was the rest of the year.”

Earnings guidance for the bank as a whole remained unchanged, although Deutsche Bank said it expects a more challenging second half given the weakening economy. That drives up provisions for bad loans and contributes to rising costs from inflation, litigation and higher contributions to the European Union’s bank resolution fund.

The lender said it could not meet a target for a cost-to-income ratio of 70 percent this year, instead forecasting a number in the “mid to low 70s.” Provisions related to investigations into employee use of unauthorized personal devices likely contributed to the headwind.

Deutsche Bank remains the target of an investigation by US regulators to determine whether employees’ use of private communications channels violates industry rules. Various US banks have said they will each pay about $200 million to settle the same investigation, and UBS Group AG was the latest European bank to report a potential hit on Tuesday. Deutsche Bank warns on costs as inflation headwinds build

Fry Electronics Team

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