Macro volatility powers Deutsche’s profits

IFR 2469 - 04 Feb 2023 - 10 Feb 2023
5 min read
Americas, EMEA
Christopher Spink

Deutsche Bank posted its highest annual pre-tax profit for 15 years after seeing a surge in activity in its core fixed income and currencies unit following Russia’s invasion of Ukraine last February.

Pre-tax profit for 2022 rose 65% to €5.6bn on a 7% rise in revenues to €27.2bn.

“The war has also created serious economic consequences, especially on the energy and commodity markets,” said chief executive Christian Sewing.

“This has helped make 2022 a year of economic challenges: a year of extreme volatility in most markets, a year of price increases not seen in decades, a year of massive, but necessary, central bank responses. All in all, a year of complexity and uncertainty.”

The German lender increasingly relies on FIC to drive its investment bank earnings. Its FIC revenues of €8.94bn, up 26% on the year, made up 89% of investment banking revenues. Origination and advisory fees fell 62% to €998m as deal flow dried up during the year amid volatile markets and rising interest rates.

That performance followed the trends of the five major US banks, whose advisory and underwriting revenue in 2022 slumped 48% from the record level in 2021, offset by an 18% increase in fixed income trading revenues. Deutsche outperformed the US banks in FIC trading but was weaker in origination and advisory.

For the fourth quarter, Deutsche's FIC revenues increased 27% to €1.52bn, in line with US banks. On the primary side, including advisory, revenues dropped 71% to just €196m, worse than the 53% average fall by US peers.

Inflation threat

Chief financial officer James von Moltke said the leveraged loan market continued to be “largely inactive . . . we remained selective in our new business dealings, with a focus on reducing our existing commitment pipeline”.

Sewing said that although mild temperatures and other factors had eased concerns about the economy, inflation could be “stickier than many people think”, which might dampen recovery prospects.

“We are now slightly more optimistic overall. But of course, there are still uncertainties – and the volatility that characterised the past year will certainly remain with us to some extent in 2023,” Sewing added.

Underlying flow business in FIC had started well this year. “They [FIC] are on full speed. People want to deal and do business with Deutsche. And we believe there are early signs the [origination and advisory] business is coming back,” said Sewing.

Indeed, Deutsche was one of the few banks where investment banking fees rose in January from a year ago, according to Refinitiv data. Deutsche brought in US$166m from advisory, underwriting and syndicated loans last month, up 3% from a year ago and far better than a 37% drop across the industry, Refinitiv estimated. That saw Deutsche rise to seventh in global fee rankings, from 11th a year ago.

Von Moltke said with rates higher FIC could also see a sustainably higher level of business. “2022 was a high point but the level of indebtedness will continue to grow globally and in the long term those liabilities will need to be serviced,” he said.

Bad bank closed

Sewing signalled the effective end of his restructuring programme since taking over in 2018 by winding up the capital release unit, set up to house more than €249bn of unwanted assets. That has been reduced by 91% to €22bn.

The remainder, mainly interest rate derivatives, will be brought back into the corporate bank and “simply run off over time”, said von Moltke. He said that since the start of 2019 the wind-down had contributed 55bp to the bank's leverage ratio, which was 4.6% at the end of 2022.

During the past three years, Deutsche has been focused on cutting costs. Last year, non-interest expenses fell 5% to €20bn. The ratio of costs to income was 74.9%, down from 84.6% in 2021, and Sewing said he still wanted to chop out another €2bn of costs by 2025.

He declined to comment on whether he would follow other investment banks in cutting jobs, but did not rule it out. “There are no guarantees we will not reduce headcount,” he said.

Loan loss provisions more than doubled, rising €685m to €1.2bn, and Sewing said he was cautious about some areas such as commercial real estate.

January fees for all banks