Equity investors usually take fright at the threat of higher interest rates. Not all, though. Long-suffering shareholders of Deutsche Bank have seen their bet begin to pay off in the past year. Thursday’s results showed chief executive Christian Sewing’s turnround is progressing. Profit before tax of €3.4bn last year hit a decade high. However, the boost from a supernormal year in 2021 should fade soon.
That did not deter Sewing from sticking to his ambitious targets on costs and revenues. The bank hit its 2022 revenue goal of €25bn early last year. Deutsche benefited from another good year for the investment bank and some one-offs, including from its fortuitous holding in the shipping group Zim. Markets applauded, lifting the shares 5 per cent.
Yet a strategy dependent upon cost-cutting must struggle with inflation. Cost pressures will come in investment banking. Even diminished by the loss of prime brokerage and equities, unit revenues of €9.7bn last year easily topped 2019’s €7bn result. However fourth-quarter weakness hints at a peak in deals just as competition with US banks over staffing heats up.
That makes the cost to income ratio target of 70 per cent for this year tough to meet. A full 15 percentage point reduction from 2021 requires not just reduced overheads but higher revenues. Some of the heavy lifting on costs is done, as planned restructuring and other charges have largely finished. These came to €1.5bn last year for a total €8.4bn to date. Their removal should knock off 5 percentage points off the ratio this year.
But even assuming revenues grow 5 per cent this year — analyst consensus predicts a decline — would mean finding an additional €1.7bn of savings to hit the 70 per cent target. That looks tough, notes Andrew Coombs of Citi. Deutsche cut out just €300m in 2021.
Which explains analyst doubts about achieving a targeted return on tangible equity of 8 per cent this year. Deutsche will need to squeeze costs harder while still achieving growth. It hopes interest rate rises will boost income. But for European banks, that prospect looks less bright than elsewhere.
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