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Christian Sewing thinks “predictability and consistency” are very important for Deutsche Bank. The German bank’s chief executive is not wrong. For much of the past 15 years, the only thing consistent about Deutsche was its ability to step on every rake it encountered. But disappointing annual results suggest anxiety over hidden garden implements remains.
Sewing has done good work rebuilding Deutsche after decades of overexpansion and mismanagement left it fighting for survival. Its shares have almost quadrupled since their low point in 2020. But its income statement on Thursday highlighted issues with predictability that help explain its lingering valuation discount compared with peers.
On the cost front, one-off expenses including litigation weighed on profits, which fell 92 per cent in the fourth quarter. The bank also moderated its cost target for 2025. The income side, meanwhile, highlighted just how reliant Deutsche continues to be on the potentially volatile business of trading.
Almost a third of Deutsche’s revenues come from its fixed income and currencies division, known as FIC. This business is doing well. Market volatility has helped to fuel demand. Between the new Trump regime in the US, a UK government facing budgetary pressures and an impending general election in Germany, there should be plenty of uncertainty to keep its momentum going into 2025.
Investors, though, tend to give only limited credit to trading income — which they fear is unpredictable and requires more capital compared to, say, wealth management.
Indeed, Deutsche’s reliance on trading helps explain why it still lags most of its European rivals at a valuation of 0.6 times tangible book. UBS, with its massive wealth management arm, leads the pack at 1.5 times.
Deutsche may have abandoned its efforts to be “Europe’s Goldman Sachs”. But in this respect it has a similar problem to its one-time US rival. Goldman’s relative over-reliance on FICC — with an extra C for commodities — has made it hard to close a valuation gap with Morgan Stanley, which has a big wealth business, and JPMorgan, a full-service retail bank.
Goldman is following a dual-track approach, trying to build alternative revenue sources while also convincing investors that trading isn’t quite as volatile as they fear. Deutsche is doing the same, highlighting the share of FIC revenues that come from extending credit to clients, or “financing” which investors see as more stable.
Sewing said on Thursday that 2025 will be Deutsche’s “year of reckoning”, when the bank will be judged on this stage of its turnaround efforts. But it will take more than one year before investors can believe the bank really has become predictable.
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