Reorganized Deutsche Bank: Profits in the billions despite the economic crisis

“Germany should build a statue for Christian Sewing,” a British investor recently said «Handelsblatt». When the head of Deutsche Bank started restructuring the institute in 2018, very few people would have believed that he could transform the bank so successfully within four years. In fact, Germany’s largest financial institution is doing reasonably well again. As the post-pandemic world steers into the next crisis of Ukraine war, massive inflation and coming recession, Deutsche Bank has almost completed its transformation and left its crisis behind.

Credit Suisse replaces the “Deutsche”.

In the past three months alone, the institute has had one Pre-tax profit of 1.6 billion euros achieved, which was the best third quarter since 2006. For the full year, Deutsche Bank could achieve a pre-tax profit of more than 6 billion euros for the first time in a long time. One could only dream of that four years ago.

At the same time, risk provisions in the lending business corresponded to only a low 28 basis points (equal to EUR 350 million) of the average lending volume, despite the adverse environment. For 2023, too, the bank expects only a minimal increase. Management seems fairly confident in the soundness of the loan book.

In the meantime, the far-reaching transformation of the institute, which was initiated with the courage of desperation in mid-2019, is coming to a successful end. Deutsche Bank has achieved most of the goals set at that time. But that took a lot of time. Credit Suisse will probably also need this time, which for its part has been in a deep crisis for some time and has long since replaced Deutsche Bank as the most scandalous institution in Europe.

The “Deutsche”, as the bank is known among market participants, was continuously in the red from 2015 to 2019, accumulating cumulative losses of a good 15 billion euros. At times, even the survival of the institute was in question. In mid-2019, Sewing and his team then decided to carry out a far-reaching restructuring of the bank.

Sewing wanted to get out of parts of investment banking, namely stock trading and parts of the interest business, make changes to the board, create a new business unit with the corporate bank, massively reduce costs and reduce full-time positions by 18,000 to 74,000.

An important and correct decision was probably not to get involved in a long-discussed merger with Commerzbank, which was also ailing. This would have made the simultaneous restructuring of Deutsche Bank considerably more complicated and probably a task that was almost impossible to solve.

Volatile Investment Banking

The effort was worth it. All four business units – Investment Bank, Corporate Bank, Retail Bank and Asset Management under the DWS brand – are now in the black and have gradually increased their revenues. This year, dependence on investment banking, which is traditionally very volatile, has also decreased somewhat. The division at times made more than twice as much profit as the bank’s other three core units. In the third quarter, investment banking was only responsible for a good 40 percent of the core bank’s pre-tax profit.

There were various reasons for this. For one, the corporate bank posted a fourth consecutive quarter of double-digit growth driven by higher net interest income and higher fee and commission income. The division also benefited from the generally rising interest rate level.

On the other hand, business with fixed-income securities and interest-bearing products continued to improve in investment banking. However, due to the deteriorating economic environment, income from credit trading and above all from issuing and consulting business fell, in some cases massively.

Deutsche Bank is increasingly able to free itself from the once massive legacy. In the meantime, the institution’s bad bank, the so-called capital release unit (CRU), is only burdening the quarterly profit by a low three-digit million range. Since its inception in 2019, the CRU has reduced its debt position by €224 billion, or 90 percent. This means that the closure of the unit, which does not belong to the core bank, is slowly getting closer.

Better control of costs

Of the former core goals of the restructuring, the bank only conceded that of reducing 18,000 full-time positions some time ago. Recently, the number of employees rose again by 1,600 to 84,500 full-time positions. In an interview with journalists on Wednesday, CFO James von Moltke attributed this primarily to three factors: Firstly, the success of the conversion resulted in a higher need for employees, secondly, the investments in the technology would have to be accompanied by more employees than expected, and thirdly, the Bank integrate certain former external service providers.

Nonetheless, the Institute has made significant progress in spending both since 2019 and this year. The cost-income ratio, which has received a great deal of attention in the industry, fell this year to an acceptable 73 percent from 82 percent in the previous year. Despite promises to the contrary, little had improved here for a long time.

CEO Sewing can be satisfied with what has been achieved so far. “We achieved our highest result in more than a decade, both in the third quarter and in the first nine months of the year,” said the 52-year-old. This underlines the successful transformation of the bank. In the coming year, the Institute is expected to issue new targets for 2025. In view of the expected recession, Sewing wrote to the employees that with the solid balance sheet “we feel very well prepared for what lies ahead”.

Sewing will probably not get a statue for his success in Germany. But word of the institute’s successful restructuring has long since spread – from the financial markets to companies to Berlin’s political establishment.

SYou can the Frankfurt business editor Michael Rasch on the platforms Twitter, linkedin and Xing follow.