The investment banking division of Deutsche Bank [ETR: DBK] benefited from the choppy markets, the company said, but the outlook has changed and it will miss a crucial cost objective.
Gas shortages from Russia are a problem for Europe, and Germany in particular. According to experts, this might cause the energy-hungry continent to see negative growth this year. The sluggish economy and increasing prices will probably make it harder for Deutsche Bank to cut costs and increase profits.
The bank stated on Wednesday that it would be more difficult to achieve its aim of an 8 percent return on tangible equity—a crucial indicator for profitability—and that it had lowered its target for cost-to-income ratio, a measure of efficiency, from 70 percent to up to 75 percent.
The return on equity for the second quarter was 7.9 percent. It had a cost-to-income ratio of 73.2%.
Inflation, regulations linked to regulatory inquiries into workers’ use of unauthorized personal devices, and the bank’s record-keeping obligations were among the factors driving up expenses, it was said.
The bank said it is not presently experiencing borrower stress, but it boosted provisions for bad loans in the quarter to €233 million, or $236 million, from €292 million in the first quarter.
“The next months will be difficult as always. According to Chief Executive Christian Sewing’s address to the workers, there is cause to think that things will only get worse economically.
For the quarter, the bank’s net profit increased by 46% to €1.21 billion. The result exceeded the €950 million average expert expectation. Both its corporate bank and its investment bank saw increases in revenue of 26% and 11%, respectively.
Due to its greater reliance on currency and bond trading, which thrives during periods of volatility, and less on fees from activities like mergers and initial public offerings, which suffer during uncertain periods, Deutsche Bank’s investment banking division performed better overall than its U.S. counterparts.
Numerous Wall Street banks reported double-digit revenue growth in the fixed income and currency markets, but this was insufficient to offset declines in deal-making.
The climate for investment banking will be a bit more difficult in the second half, according to James von Moltke, the bank’s finance officer. The division should generate the same amount of income this year as it did last year, according to Deutsche Bank.
While businesses, notably in Germany, are grappling with greater prices and the possibility of gas shortages, revenue at its corporate banking division will increase. According to Mr. Sewing, the bank has been able to do more business with customers, which has increased loans and deposits. The ECB’s anticipated future interest rate increases are also likely to be advantageous for Deutsche Bank’s core lending operations.
Despite the uncertainties, according to Mr. von Moltke, customers are seeing healthy order books and are resolving supply-chain problems. He said that businesses are also relocating their gas supplies away from Russia. He said, “We are heartened by the level of resiliency.
The price of Deutsche Bank’s stock decreased 4% on Wednesday, bringing its year-to-date loss to over 25%. They trade at less than a third of what investors often use as a yardstick, or book value. They are among the lowest-priced major European bank shares as a result.