Deutsche seeks to break vicious cycle with growth elusive

DEUTSCHE BANK AG Chief Executive Officer Christian Sewing is showing signs of steadying the lender after a bitter boardroom battle. He now faces the same challenge that eluded his predecessor: how to boost revenue after slashing costs and cutting thousands of jobs.

The German lender on Wednesday reported its lowest third-quarter revenue since 2010 and now predicts a slight decline for the full year, after earlier guiding for a flat result. While cost cuts should help the bank post its first annual profit in four years, Sewing said the focus now has to be on growing the top line without compromising controls.

“We made headway on our cost reductions,” Sewing wrote in a memo to employees. “On the other hand we have not yet achieved a turnaround in terms of revenues.”

For investors who have been through the bank’s previous turnaround plans, it’s a familiar pattern. John Cryan, Sewing’s predecessor, had vowed to restore “controlled growth” last year after raising fresh funding, but failed to deliver.

Sewing has staked his turnaround effort • the bank’s fourth in three years • on improving profitability by trimming costs and refocusing on fewer, core activities. Yet the continued contraction in the top line risks undermining investor confidence in the strategy and may fuel speculation that the lender needs to combine with a rival in the long run.

“Costs are in line with targets,” said Daniel Regli, an analyst with MainFirst who has a hold recommendation on the stock. “But there is continued weakness in investment bank revenue. That needs to be fixed.”

In the third quarter, trading income in the key fixed-income and currency division slumped 15% from a year earlier. Equities trading, where Wall Street banks on average posted gains, declined at the same pace. The business has been among the hardest-hit by executives departures recently.

Sewing is cutting at least 7,000 jobs and retrenching in investment-banking areas such as prime finance, US rates and corporate finance in the US and Asia. The bank cut another 700 positions in the third quarter after eliminating about 1,700 jobs in the three months through June.

Cost reductions have left the business stuck in what Chief Financial Officer James von Moltke has called a “vicious circle” of declining revenue, “sticky” expenses, a lowered credit rating and rising funding costs. The bank on Wednesday highlighted higher funding costs and geopolitical events among the headwinds for the securities unit.

The investment bank’s origination and advisory business fared a little better, with a decline of 1%. Sewing said the bank won leading roles in six of the 10 biggest transactions by fee volume during the third quarter.

Garth Ritchie, who heads the securities unit, urged employees in a memo to “focus resolutely on rebuilding revenue momentum” in the final quarter. Von Moltke said on a conference call that the bank wants to redeploy excess cash to return to growth, as restructuring expenses are likely to be lower than previously expected. He said rating companies would be comfortable with such use of capital.

“We need to end the year on a strong note,” Sewing wrote in his memo. “We’ll stay disciplined on costs, and we’ll turn around revenues.” •