Deutsche Bank braces for spike in bad loans

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Deutsche Bank is bracing for a spike in bad loans, with the German lender ramping up provisions for credit losses as it reported a less severe fall in profit that had been expected.

In second-quarter results released on Wednesday the group said it had raised loan loss provisions to €401mn, a 72 per cent rise on a year earlier, with the bulk of the hits coming from commercial real estate and German midsized companies.

Net profit attributable to shareholders was 27 per cent lower than a year earlier, driven by a 9 per cent drop in its bond trading revenue and a 15 per cent rise in costs. Return on tangible equity was 5.4 per cent, against 7.9 per cent a year ago and a medium-term target of more than 10 per cent.

The bank’s pre-tax profit in the first six months of the year still reached its highest level in 12 years, with Citi analyst Andrew Coombs praising a “good set of results”.

However, shares in the German lender fell 1.5 per cent in early morning trading on Wednesday, underperforming the wider German market.

Deutsche said full-year loan loss provisions would be at the upper end of its previous guidance of 25 to 30 basis points of average loans because of “the uncertain macroeconomic backdrop and lower loan balances”.

Chief financial officer James von Moltke told journalists that the bank was confident that loan losses would not overshoot that guidance, barring a big deterioration in macroeconomic circumstances.

“We feel that we have a handle on the risk,” he said, adding that the absolute level of loan losses was still relatively low despite the economic downturn.

The increase in costs was driven by a €395mn provision for litigation, including a $186mn fine by US authorities announced this month and €260mn in restructuring costs and severance pay.

While Deutsche said this year that it would cut 800 senior back office jobs in an attempt to cut €2.5bn over the next few years, its total workforce rose for the fourth quarter in a row and at 87,000 was at the highest level since 2019, when its major restructuring started.

However, chief executive Christian Sewing warned staff in an internal message on Wednesday that the job cuts entail “tough decisions”.

The lender’s profit in the second quarter was still higher than expected by analysts as revenues in the corporate bank surged by a quarter, while those in the private bank were up 11 per cent, both driven by rising interest rates.

The common equity tier 1 ratio, a key benchmark of balance sheet strength, rose by 0.2 percentage points to 13.8 per cent and was well above the bank’s minimum target of more than 12.5 per cent.

Deutsche disclosed late on Tuesday that it would spend €450mn on share buybacks this year — double the figure for 2022 — after postponing a decision about the size and timing earlier this year.

Sewing said that the regulatory approval for its move showed that “our regulators also recognise the strength and stability” of Deutsche Bank.

Including dividends, Deutsche said it would pay out more than €1bn to investors this year, compared with €700mn in 2022. It said on Tuesday that it stood by its promise pay out another €6.25bn to investors by 2025.