Deutsche Bank reduces cost cut target and warns of challenging next half

Deutsche Bank has ditched an already reduced cost-cutting target for this year, warning of “higher-than-expected bank levies, inflation, unforeseen costs related to the war in Ukraine and litigation matters”.

This combination of factors has put its goal of bringing costs down to 70 per cent of income out of reach, Deutsche said on Wednesday. It is now aiming for a cost-to-income ratio of up to 75 per cent.

Last year, Germany’s biggest lender abandoned its aim of bringing annual costs down to €16.7bn and instead switched to targeting a cost-to-income ratio, which at that point was 85 per cent.

In results published on Wednesday, Deutsche Bank also reported that second-quarter profits jumped 46 per cent to €1.2bn, far exceeding analyst expectations.

Andrew Coombs, an analyst at Citi, called the quarter’s performance “solid” in a note to clients, adding that the altered cost target brought the bank’s guidance in line with what analysts were expecting. Anke Reingen, an analyst at RBC Capital Markets, said the new cost target was “unhelpful”.

Deutsche set aside €165mn for regulatory fines and litigation costs, with the bulk of that money being earmarked for a possible penalty over the use of WhatsApp and other unauthorised communication channels by its staff. Earlier this year, all executive board members voluntarily waived €75,000 in bonuses over the issue, which US and European regulators are investigating.

Deutsche confirmed its full-year revenue target of €26bn-€27bn, up from €25.4bn in 2021, but warned that the second half of the year would be “more challenging” than the first.

It also warned that its full-year target of generating a post-tax return on tangible assets of at least 8 per cent would become more difficult to meet. In the second quarter, this critical profitability benchmark stood at 7.9 per cent, up from 5.5 per cent a year earlier.

The all-important bond trading division reported a 32 per cent year-on-year increase in revenue, slightly better than its five main US investment banking rivals, where fixed-income trading revenue was up 31 per cent on average.

Pre-tax profits at its wider investment banking business were flat at €1.1bn in the quarter, with costs rising quicker than revenue. Deutsche’s corporate bank, which offers cash management, trade finance and other services to companies, reported a 26 per cent year-on-year rise in revenue and a doubling of pre-tax profit, buoyed by rising interest rates.

Deutsche’s asset manager DWS, which was rocked by a police raid over alleged greenwashing and the subsequent ousting of its chief executive Asoka Wöhrmann in the quarter, had a second consecutive quarter of net outflows, reporting an 8 per cent drop in assets under management to €833bn. At €155mn, the unit’s net profit was 10 per cent lower than a year earlier.

The bank’s core equity tier one ratio, a crucial indicator of balance sheet strength, was 13 per cent at the end of the second quarter, compared with 12.8 per cent a year earlier, despite a tripling of loan loss provisions to €233mn.

“We can deliver growth and rising profits in a challenging environment,” said chief executive Christian Sewing in a statement.

Shares in Deutsche Bank were down more than 3 per cent in morning trading in Frankfurt, and have fallen about 30 per cent since the start of the year.