Merkel’s vote of confidence in Deutsche Bank refutes the lender’s problems


By Tom Sims and Patricia Uhlig

FRANKFURT (Reuters) – Angela Merkel will give a welcoming speech at Deutsche Bank’s annual New Year’s reception on Thursday.

Merkel will speak just a week after the lender announced its first annual profit since 2014, a major milestone in CEO Christian Sewing’s efforts to revive the fortunes of the Germans.

However, investors and analysts said the bank’s outlook remains uncertain despite Merkel’s symbolic vote of confidence.

They praise Sewing for cutting costs, but question the bank’s ability to generate revenue after revenues declined in all of its core businesses last year except for the investment bank.

Thanks to a pandemic-induced trade boom, the Germans managed to make lemonade out of lemons last year, said Alexandra Annecke, portfolio manager at Union Investment, a partner in the bank. “The bank is still on thin ice.”

The German, which is in the middle of a major overhaul, is expected to generate 1.6 billion euros less in sales in 2022 than in 2020, a decrease of 6%, based on a consensus forecast by analysts.

All divisions will generate roughly the same or less over this period, with the exception of Asset Management.

The bank declined to comment on this story.

“We have to ask Christian Sewing where he wants to earn his money in the next three to five years,” said Klaus Nieding from the DSW shareholder lobby. “The bank needs more fields in which they can earn the money they need.”

The German has some ideas in the pipeline. The retail banking division, which has 22 million customers, hopes to increase the number of customers being billed for deposit fees, the unit’s bankers said.

The Asset Management division wants to grow in Asia, while the corporate bank plans to expand in the Merchant Payments division.

“Actually, it is crucial to … revive corporate banking in areas where there was previously a lack of presence,” said Michael Rohr, an analyst at Moody’s, one of the rating agencies that have become more confident about the bank’s prospects.

Increasing profitability in the other areas is important in order to diversify the bank’s revenue streams, said Ioana Sima, director at Fitch.

“If the investment bank is having a bad year, which it may have, these other companies can wear it,” Sima said.

Sewing said the investment bank should only contribute 30% of core revenues. In 2020 it was just under 40%.

Low interest rates and fierce competition have depressed banks’ profits across Europe, which is why Sewing, who took over the helm of the bank in 2018, mainly focused on costs. He is cutting 18,000 jobs and has closed some stores.

DISTANCE

Merkel has largely distanced herself from the country’s banking sector since the 2008 financial crisis triggered unpopular tax-financed bailouts.

This year, Merkel’s office happily accepted Sewing’s invitation to a virtual reception on Thursday.

“Given the 150-year history of Germany’s largest bank and the importance of the German banking industry in the current challenging situation, an appreciative appreciation is only natural,” said her office.

In private, bankers have complained that Germany’s politicians do not want to support the industry like other sectors such as cars.

In addition to financial difficulties, the German had to cope with a number of scandals and costly regulatory failures, including money laundering.

In an effort to change that era, Sewing has strengthened the bank’s compliance activities. He urged employees to regain their “hunter mentality” and preached ruthless cost control.

But it’s too early to judge whether he’s managed to turn the bank around.

“The jury is pending,” said Giles Edwards, analyst at S&P.

(Additional reporting by Andreas Rinke in Berlin. Editing by Jane Merriman)

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