It’s another big day for corporate earnings with the main focus still on the banking sector, with the release of the latest numbers from Deutsche Bank and RBS.
The collapse of merger talks yesterday between Deutsche Bank and Commerzbank prompted Deutsche to release some details of its quarterly performance early, with the numbers serving to highlight how the bank is fighting a losing battle to turn itself around.
Quite simply the problems facing Deutsche are still too large to make it a compelling takeover partner, let alone a merger partner. We know this only too well from Lloyds Banking Group and the poison pill it was forced to swallow in the form of Halifax Bank of Scotland a decade ago. Deutsche’s problems are not new, we know this from the huge loss that was reported in 2016, yet the bank hasn’t been decisive enough or ruthless enough in dealing with its problems.
This morning’s numbers merely serve to reinforce these problems, as the bank cuts its guidance for 2019. Revenue fell 9% to €6.35bn, from a year ago, while profit before tax fell from €432m to €292m, a fall of 32%. The corporate and investment bank saw revenue decline by 13% to €3.3bn, with most areas of the business underperforming. The biggest declines came in fixed income and equities, with revenue falling 19% and 18% respectively, on the back of the lower volatility in FX, credit and equity markets.
Deutsche’s biggest problem remains its cost base, which remains well above a lot of its comparable peers, along with outdated IT systems. Its headcount is still over 90k in a sector that in Germany remains seriously overbanked, and where its European rivals are way ahead of them in terms of restructuring, RBS being a case in point. The fear is that Deutsche may have left it too late in terms of restructuring its business, and without government support the fear is it will slide into obscurity.
This morning’s Q1 update from RBS has been overshadowed somewhat by yesterday’s news that CEO Ross McEwan will be leaving the business in the next 12 months, although the numbers do illustrate how much the bank has moved on from when he took up the position back in 2013. In a contrast to how Deutsche has dealt with its costs, RBS has slashed headcount since 2013 from 118k to around 70k employees. In 2008 the bank employed nearly 200k people.
In that time the bank has returned to profit having navigated its way through a number of expensive and in some respects toxic legacy issues which overshadowed the underlying business, which has been large fairly profitable over the last few years. The dividend has also been restored and the government has pared back its stake to 62%, and while long-term risks remain, including some form of nationalisation if the political environment changes, the fact is that RBS is a much different bank now than it was a few years ago.
In its first quarter of 2019 the bank reported an operating profit of just over a £1bn, beating expectations by around 10%, even though revenues were slightly below estimates at just over £3bn. Overall profits were still slightly lower from the same period last year, coming in at £707m compared to £808m. The lower profits and miss on revenue along with the prospects for future income growth is being blamed on uncertainty over the economic situation in the UK against a difficult political backdrop. Businesses appear to be delaying making large capital commitments until the situation around the UK’s future relationship with the EU is resolved.
Net interest margin was also slightly lower from a year ago, at 1.89%, as expectations around future UK interest rate rises get pushed out further into the future, flattening the yield curve in the process, while impairments were also slightly higher at £682m.