October 30, 2017 / 10:46 AM / a year ago

Fitch Sees Deutsche Bank's Earnings Pressure Continuing after Poor 3Q17

(The following statement was released by the rating agency) LONDON, October 30 (Fitch) Fitch Ratings says Deutsche Bank is set to see weak earnings for full-year 2017 after it continued to report a disappointing result in 3Q17 and due to a sizeable restructuring charge anticipated by management in the fourth quarter. In its latest results, the bank reported a return on tangible equity (RoTE) of 4.5% for the quarter and 4.1% for 9M17, well below its self-imposed longer-term target of 10%. The higher relative weight of fixed income and currency (FIC) trading in Deutsche Bank's earnings mix, the lack of a strong source of profits outside the more volatile corporate and investment bank (CIB) and the less favourable interest rate climate in Europe than the US meant that the bank was more affected by the poor trading environment than global peers. In addition, enduring franchise damage from bad publicity in late-2016 continued to feed through to revenue in 3Q17. Fitch's expectation that implementation of the bank's plan to improve earnings was going to be challenging and prolonged by the European Central Bank's continued very low policy rate contributed to last month's downgrade of Deutsche Bank's ratings. Low volatility and subdued client engagement hit FIC trading particularly hard, with revenue decreasing 36% yoy (24% after adding back the contributions from the financing and global transaction banking segments, which until recently were reported together with FIC). Balances and margins have not fully recovered in prime finance, which continued to weigh on equity sales and trading revenue. In origination and advisory, deals the bank had missed out on in late 2016 are now impacting profits. However, management pointed out that the bank now has an improved pipeline of deals, which should contribute positively to revenue in the coming quarters as the deals close. In the private and commercial bank (PCB) division underlying revenue was stable, excluding the benefit of asset sales and the workout of a legacy position. Lower net interest income was balanced out by higher fee income from investment products and Deutsche Postbank AG's (Postbank) current accounts. Overall return on tangible equity was a fairly low 6.8%. Management is addressing the lower returns with the reorganisation of the bank's two retail and commercial banking subsidiaries, which are targeted to bring some EUR900 million synergies by 2022. Deutsche Asset Management's underlying revenue declined, as the division earned lower fund performance fees. A one-off recovery helped pre-tax profits rise to EUR195 million in 3Q17, slightly up yoy, after adjusting for revenue and expenses from Abbey Life, which was sold in 4Q16. The bank's non-interest expenses decreased in 3Q17, due to low litigation and restructuring costs and, to a lesser extent, lower professional services fees (legal, consulting fees). However, the bank's flexibility to adapt to weak revenue quarters is limited. Front-loading of Postbank integration costs will negatively affect earnings in 4Q17 when management anticipates booking restructuring charges following recent progress made in negotiations with the workers' council. Loan impairment charges and conduct costs have been particularly low throughout 9M17, and may tick up in 4Q17. The decrease in Deutsche Bank's CET1 ratio to 13.8% from 14.1% in the quarter was driven by a EUR1 billion reduction in regulatory capital, of which EUR0.4 billion was the effect of foreign currency translation and EUR0.5 billion additional deductions of deferred tax assets and other intangibles. Interim profit of EUR600 million for the quarter is excluded from regulatory CET1 in line with regulatory guidance. Risk-weighted assets were flat including a negative EUR3 billion foreign currency effect, which offset an underlying increase mainly due to an operational risk component. The bank's leverage ratio remained flat at 3.8% on the quarter. Liquidity remained high with EUR279 billion reserves at end-9M17 and a liquidity coverage ratio of 141 % Contact: Bridget Gandy Managing Director +44 20 3530 1095 Fitch Ratings Limited 30 North Colonnade London E14 5GN Ioana Sima Associate Director +44 20 3530 1736 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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