After conversion: Deutsche Bank creates billions in profit

After crises and scandals, Deutsche Bank sees itself on the way to old strength. The restructuring of the group seems to be having an effect. Germany’s largest money house earns well with traditional banking.

Germany’s largest private financial institution, Deutsche Bank, has a pre-tax profit of around 5.6 billion euros. That is 65 percent more than in the previous year and thus the best result in 15 years. The bottom line is just over five billion euros, minus taxes and interest payments to holders of subordinated bonds. The financial institution has thus clearly exceeded the expectations of the analysts and even exceeded its self-imposed goal of a return on equity of eight percent.

On the one hand, the bank benefits from a positive tax effect in the billions in connection with the business in the USA. It is not a tax refund, but an accounting revaluation, it says. On the other hand, sales are increasing – to 27 billion euros. Investment banking, which has now been cut back, remains an important source of income, with the bank having almost completely separated from stock trading.

Profiteer of the turnaround in interest rates

Continuing trading in bonds and currencies is doing very well and is being fueled by the volatility in the markets. As a result, the bank can largely absorb the weakening issuing and consulting business. With fewer IPOs, mergers and acquisitions in 2022, there was clearly a lack of orders in this space. According to media reports, investment bankers in this division are therefore threatened with severe cuts in bonuses. Overall, however, premiums in investment banking are expected to fall by less than ten percent.

In addition to investment banking, business with private and corporate customers is becoming increasingly important for the bank. In the past year, the financial institution, like others, benefited from the turnaround in interest rates. “The tide is rising and all boats are being lifted,” is how Jan Pieter Krahnen, financial market expert at the Leibniz Institute SAFE in Frankfurt, puts it.

More risk prevention needed

Because of this, Deutsche Bank can again charge higher interest rates for loans. However, she has to secure these loans again with more money. Against the background of the Ukraine war, risk provisions for loan defaults have increased significantly: to EUR 1.2 billion.

The Deutsche Bank subsidiary DWS, for its part, announced a slump in profits for the past year due to falling prices on the stock exchanges. In addition, there are costs for legal advice. It is likely to be about greenwashing allegations. Among other things, the public prosecutor’s office in Frankfurt is investigating the fund company because it is said to have presented and sold its financial products in prospectuses as more sustainable than they really were. The investigation is ongoing, the prosecutor said when asked. And there are other problems, for example in the IT area: The merger of the IT systems at Postbank and Deutsche Bank around the turn of the year did not go smoothly.

Despite these difficulties, Christian Sewing, head of Deutsche Bank, is convinced of his new strategy and describes the restructuring of the bank as successful. As a result, the company is now more broadly based, more efficient and more profitable. “The traditional banking business contributes significantly more to the income,” notes banking expert Krahnen. That makes the bank more resilient.

Fewer jobs cut than feared

In 2019, Sewing had given the money house a radical downsizing program with severe cuts. The aim: to make the bank more independent of investment banking, which is prone to fluctuations, and in particular to separate it from stock trading. Around 18,000 jobs should be lost by the end of last year. The bank has actually cut 6,500 jobs so far and still employs almost 85,000 people across the group.

According to the German Bank Employees’ Association, the job cuts initially caused uncertainty, but were well negotiated. Group works council chairman Frank Schulze speaks of a good social plan that has been implemented fairly. The bank offered reasonable severance payments and convincing partial retirement models.

“Deutsche Bank is getting boring”

All in all, things have calmed down around the bank, says banking expert Hans-Peter Burghof from the University of Hohenheim: “It has become downright boring.” And that counts as a compliment, especially for German banks, which live very much from the trust of their customers.

Although the bank itself, with its billions in profit, does not come close to the even higher results before the financial crisis, says Burghof: “However, at the time it was only able to earn so much because it accepted legal risks that later cost a lot of money.” That had brought her billions in losses in recent years.

In the meantime, however, the financial institution seems to have regained its composure: According to its own statements, it started the new year well and expects further growth. The company wants its shareholders to share in its own success: the board of directors is proposing a dividend of 30 cents per share for the past year, after 20 cents in 2021.