Energy crisis in Europe, an imminent recession and ongoing corona upheavals in global supply chains: the German economy is in a tight spot, and fears of de-industrialization are rampant in Europe’s largest economy. As an indicator of the economic situation, Deutsche Bank has so far been unimpressed. Thanks to rising interest rates and stable lending, the institute has achieved its highest quarterly profit in 15 years. In the three months to the end of September, Germany’s largest financial institution earned 1.2 billion euros after taxes, which is far more than observers had expected. We are “right on course to achieve the goals for 2022,” said CEO Christian Sewing when the quarterly figures were published on Wednesday morning.
A good three years ago, Sewing ordered the bank to change its strategy and set new goals that had been adjusted several times, which he hopes to have achieved by the end of this year. After years of struggling with weak earnings, expensive scandals and high losses, the bank seems to be on the right track with its ninth quarterly profit in a row.
The surprisingly strong result was mainly due to a factor over which the institute has no influence: the rising key interest rates on both sides of the Atlantic are helping to earn more again in the classic lending business. Compared to the previous quarter, net interest income rose by nine percent, compared to the same period last year by almost a third. Business with private and, above all, business with corporate customers contributed to this. In fact, despite the gloomy economy, the bank even granted more loans.
The bank may even exceed its year-to-date revenue target
In contrast, results in investment banking were mixed. In booming fixed income and currency trading, the bank grew earnings significantly and significantly more than its US Wall Street peers. In the business of takeovers and mergers, IPOs and bond issues, there was hardly anything left to do given the upheavals on the world stock exchanges: income in this segment collapsed by 85 percent compared to the same quarter last year. US media, citing insiders, had already reported on Tuesday that the institute would be laying off several dozen investment bankers in London and New York.
Nevertheless, the Management Board is not lacking in self-confidence in view of such strong group results. Sewing even indicated that it might be able to exceed the earnings target of 26 to 27 billion euros for this year – but at the same time the bank is also facing greater “cost pressure”.
CFO James von Moltke described the year 2022 as a “milestone for Deutsche Bank”, but held back with predictions about future business development. It is still too early to give a concrete outlook for 2023, he said. The bank wants to build on the results of the current year, but the prospects are “very uncertain”https://www.sueddeutsche.de/wirtschaft/. “We have to be realistic,” said von Moltke. The coming year will hold many risks. This also includes those who can hardly be calculated.
Higher risk provisioning, but largely serenity
With all the warnings about the uncertain situation, what is particularly striking is the calmness with which those responsible for the group talk about the economic prospects. If you look at Germany’s largest money house as an economic seismograph, the situation currently seems to be less bad than expected. This can be seen in the provisions for loan defaults, which rose to 350 million euros in Deutsche Bank’s balance sheet. While that’s three times the previous figure, it’s in line with what analysts were expecting. For 2023, von Moltke expects risk provisions to be higher again, albeit within a manageable range. The number will remain “relatively stable” relative to outstanding loans, he said.
Moltke was annoyed by the discussions about a special loan program by the European Central Bank, with which the monetary authorities wanted to boost lending in the Corona crisis. According to estimates, the banks in the euro zone could expect around 40 billion euros in risk-free additional income by parking excess liquidity from the loan program back at the central bank. The central bankers are currently discussing capping this additional income. According to von Moltke, it was “a disappointment to subsequently change the conditions of this monetary policy instrument”. After all, the banks have implemented what the ECB expected of them by expanding lending – and previously paid for it in the era of negative interest rates.