Troubled German banking giant Deutsche Bank AG (DB, Financial) reported third-quarter earnings on Wednesday, and the results were not pretty.
Shares of Deutsche are down more than 7% as of writing, and it’s not difficult to see why. The bank posted a $924 million loss for the quarter, with the majority of the bleeding coming from the restructuring costs and fixed-income trading. Investors had been well aware that this year would be a painful one, with planned annual restructuring costs of $7.4 billion and 18,000 job cuts, but it appears expectations were not low enough.
Falling revenues
Revenue fell 15% to $5.9 billion, missing analyst expectations of $6.2 billion. In an unusual turn of events, Deutsche’s "bad bank," which was set up to take some of its worst-performing assets off the books, recorded negative revenue for the quarter. Management chalked up these disappointing results to a challenging interest rate environment and global economic instability, but this did not distract investors from the fact that the company has badly lagged its peers in a number of categories. In particular, its fixed-income trading unit, one of the largest and most important divisions in the bank, showed a 13% decrease in revenue.
As a whole, Deutsche’s peers have reported an 11% increase in revenue this quarter, which underscores how poorly the bank has performed as of late. When it comes to fixed-income trading, which has historically been a cash cow for investment banks, rivals like Morgan Stanley (MS, Financial), Barclays and JPMorgan Chase (JPM, Financial) all recorded revenue increases in the double digits for their bond trading divisions.
CEO Christian Sewing, who has taken on the unenviable job of reviving the ailing bank, maintained that these results demonstrate Deutsche is ahead of schedule in on all metrics when it comes to restructuring, including “balance sheet reduction, cost reductions and franchise stability.” The big target for 2020 is to breakeven on the year.
Verdict
Over the last several years, Deutsche has gone from bad to worse. At every point in this saga, I have seen articles suggesting that now might be the time to buy the dip on this European behemoth. I assume that today will be no different.
As Sewing and Co. grapple with the difficult task of unwinding Deutsche’s enormous derivatives book and dealing with its bad assets, it is fair to question whether there will be more bad news to come. As Warren Buffett (Trades, Portfolio) is fond of saying, “There is never just one cockroach in the kitchen.” Additionally, even if Deutsche manages to stop the bleeding, there is no guarantee it will be able to quickly reclaim the position it once held amongst its Wall Street peers. The road ahead is long, and I see no reason to get involved with the stock at this point in time. For this reason I will be giving it a wide berth.
Disclosure: The author owns no stocks mentioned.
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