Deutsche Bank warns of costs due to rising inflation

Deutsche Bank AG slashed an efficiency target for the year and warned that a key profitability target was becoming harder to reach, as the economy weakened and war, inflation and litigation in Ukraine drove up spending.

He muted the outlook published on Wednesday with second-quarter results, bearing a strong performance at the corporate bank, which benefited from higher interest rates, as well as in fixed-income trading, which beat Wall Street in a volatile market .

Chief Executive Officer Christian Sewing has so far stuck with the key pledge of its four-year turnaround plan, a return of 8 pc on tangible equity this year. They have benefited from a years-long trading rally and, most recently, rate hikes by the European Central Bank and the Federal Reserve. But with the economy slowing down, inflation showing no signs of moderating and a plethora of other challenges, prospects are clouded for the rest of the year.

“We see there are some challenges ahead and we have reflected this in our approach,” Chief Financial Officer James von Moltke said in an interview on Bloomberg TV. Deutsche Bank “had some setbacks in the first half that were beyond our control and we continue to see spending pressure in the second half of the year.”

Pretax profit in the second quarter, at €1.55bn ($1.57bn), came in well ahead of analyst estimates of €1.39bn. Deutsche Bank said it was the best second quarter since 2011.

At the corporate bank, higher rates drove a 26pc increase in net revenue to €1.6bn, the highest since the unit’s formation in 2019 when Sewing unveiled its restructuring plan. The private bank, which operates the lender’s retail operations, saw a 7 per cent increase in revenue compared to a year ago. Both businesses were grappling with the impact of negative interest rates in Europe, which the ECB ended last week.

Fixed-income trading, which largely drove Deutsche Bank’s rebound under tailing, rose 32 percent from a year ago, limiting two years of market-share gains. The five largest US investment banks, which reported second-quarter results earlier this month, saw an average 31 percent growth in fixed income trading.

At the same time, revenue from consulting deals and capital raising declined 63 percent from a year earlier, prompting Deutsche Bank to lower its guidance for the investment bank, the largest revenue contributor. The lender said it now expects unit revenue to be essentially flat this year, while for a slightly higher top line than previous guidance.

“The market needs a direction and it doesn’t exist in late June, early July like the rest of the year,” von Moltke said in the interview.

Revenue guidance for the bank remained unchanged, even as Deutsche Bank said it expects a more challenging second half with the economy weakening. This is adding to rising bad debt provisions, rising costs from inflation, litigation and higher contributions to the European Union’s Bank Resolution Fund.

The lender said it would not be able to reach a cost-income ratio target of 70pc this year, instead predicting a figure in the “mid- to low-70s”. Provisions involving investigations into employees’ use of non-approved personal equipment potentially contributed to the headwind.

Deutsche Bank is still the target of an investigation by US regulators to see whether employees’ use of private communication channels violated industry regulations. Various US banks have said they expect to pay around $200 million to settle the same investigation and UBS Group AG on Tuesday became the latest European bank to mark a potential hit.