Deutsche hits bad-debt snag on road to growth
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Pierre Briancon
BERLIN, Oct 23 (Reuters Breakingviews) -Being the largest bank in Europe’s weakest economy has a downside. Deutsche Bank DBKGn.DE returned to profit in the three months to Sept. 30, after a large litigation provision had pushed it into the red in the previous quarter. Investors, however, are worried about rising bad-debt provisions, linked to the 31-billion-euro lender’s weak domestic market. That is taking the shine off CEO Christian Sewing’s otherwise encouraging growth story.
After a 31% year-on-year increase in pre-tax profit, to 2.3 billion euros, Deutsche Bank on Wednesday announced its intention to resume a share buyback program. Investors focused instead on a worse-than-expected forecast for loan-loss provisions, sending the shares down 3%. Full-year charges for bad debt will total 1.8 billion euros, or about 38 basis points of the average loan portfolio, Sewing said. The previous forecast was slightly above 30 basis points.
Even though the bad loans news spoiled Sewing’s party, the bank hopes that provisions on the commercial real estate portfolio, notably in the United States, might decrease in the next few months due to the delayed impact of lower interest rates. Looking ahead, Sewing can also take comfort in the strong performance of Deutsche’s investment bank, where revenue rose 11% in the quarter, accounting for most of the bank’s growth. It now represents a third of the German lender’s top line, helped by a 24% growth in advisory fees.
Looking ahead, the bad loan surprise underlines the vulnerability of Deutsche Bank to the German market, one of Europe’s slowest growing economies this year and next according to this week’s International Monetary Fund forecast. Both the corporate bank’s revenue, down 3% year-on-year, and the private bank’s, which remained flat, were hit by lower interest income following central-bank rate cuts. Since more easing is on the cards, this raises the question of how Sewing can keep the top line expanding.
Germany offers some opportunities. The country’s “Mittelstand” network of mid-size corporates is undergoing a generational transfer of ownership and wealth that Deutsche aims to seize upon. But that may not be enough to offset falling rates.
Investors may hope that M&A offers a solution. Yet Sewing has often said he is not interested in taking over rival Commerzbank CBKG.DE, which Italy’s UniCredit CRDI.MI is now eyeing. Deutsche also pointed out in a statement on Wednesday that mergers and acquisitions amongst its rivals might “threaten [its] business model”, and impact its capacity to “grow non-organically”. That hardly sounds like a blanket, principled pledge to abstain from M&A – either outside Germany, or within.
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CONTEXT NEWS
Deutsche Bank on Oct. 23 raised its loan-loss provisions forecast for 2024, against the backdrop of a weak German economy.
Germany's largest bank increased its bad-debt provision forecast for the second time over the last few months.
Deutsche's 15-quarter profit streak had been interrupted in the second quarter after the bank made a large provision for a shareholder lawsuit resulting from its multistage acquisition of Postbank, which started in 2010. Deutsche has since settled some of the cases and cut provisions by 440 million euros ($475 million), helping to boost profit.
Shares in Deutsche Bank were down roughly 3% to 15.85 euros as of 0848 GMT on Oct. 23.
Deutsche's rising loan-loss charges https://reut.rs/4hjl9kw
Editing by Liam Proud and Streisand Neto
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