FRANKFURT, Germany – Deutsche Bank AG reported its first full-year net income in four years despite an expected fourth-quarter loss, but still disappointed investors with continued revenue declines and other signs of vulnerability.
The bank’s executives said they are on track to keep cutting costs and improving performance. But Friday’s results, while improved, show the continued struggle by Germany’s biggest lender to make enough money to quiet speculation about its future.
The German government is prepared to back a potential merger of Deutsche Bank and smaller rival Commerzbank AG if both banks fail to gain traction in their prolonged turnaround efforts, The Wall Street Journal reported Thursday, citing government officials and people close to the banks. Executives of both banks have said they are focused on their separate strategies.
Chief Executive Christian Sewing on Friday sought to diffuse the merger speculation without directly addressing any discussions, instead highlighting established Deutsche Bank goals. “We have our plan, and we are working very, very hard on realizing this plan. And a lot of comfort we take from 2018,” he told analysts on an earnings call. “On everything else, we do not speculate.”
The fourth-quarter loss, hurt by a steep decline in fixed-income trading, was smaller than a year earlier and had been expected by analysts, who cited a tough trading environment and Deutsche Bank’s own strategic challenges. The full-year 341 million euros ($392 million) profit was short of the roughly 420 million euros average expectation of analysts, whose forecasts were compiled by the bank. It followed a net loss of 735 million euros in 2017.
The bank beat its full-year cost and head-count targets, it said.
Full-year net revenue totaled 25.3 billion euros, slightly short of analysts’ average estimate, and was down 4 percent from 2017. Fourth-quarter revenue was 5.6 billion euros, down 2 percent from a year earlier, also lagging behind expectations.
The lender’s investment-banking performance was hurt in the fourth quarter by 23 percent declines in both fixed-income trading revenue and the overall deal-advisory and origination business.
Deutsche Bank’s retail-banking unit generated a 6 percent increase in fourth-quarter revenue from the prior year. Its struggling asset-management business continued to lose ground.
Shares in the lender opened 3 percent lower Friday.
Deutsche Bank had several factors working against it in late 2018. Fixed-income trading revenue was weak for banks generally, including stronger US competitors. And Deutsche Bank is more dependent on trading revenue than many of its peers. Fourth-quarter stock-trading revenue was essentially flat for Deutsche Bank, so it did not get the boost from that business some other banks did to offset weak fixed-income trading.
A high-profile November raid of Deutsche Bank offices, including its Frankfurt headquarters, in connection with a German money-laundering and tax-evasion probe spooked clients, bank executives say. The lender also continued to battle high funding costs that make every dollar of profit harder to come than for more-stable banks. An economic slowdown in Europe poses another hurdle.
Still, the full-year profit is a sign that Germany’s biggest lender has regained some footing, after three consecutive years of after-tax losses eroded investor confidence. The bank’s full-year 2018 costs of 22.8 euros billion came in below its 23 billion euro target. It also said it reduced full-time employees to about 91,700 at year-end, beating its target of 93,000. And the bank said no big new litigation risks have arisen, and it has put behind it most known legal threats it considers material to investors.
The lender faced seismic doubts about its capital position in 2016, raised $8.5 billion in fresh capital in 2017 and has stockpiled cash to reassure investors and regulators of its safety. Last year, the bank replaced its CEO with Sewing, a longtime executive. He enjoyed an initial surge in confidence, but that waned amid overriding questions about whether Deutsche Bank can make enough money to halt a talent drain and survive in the long term in its current form.
Sewing struck a positive tone Friday, though, saying in a statement, “In 2019 we aim not only to save costs but also to make focused investments in growth.”
The bank’s fundamental strategy has fueled persistent doubts among clients, investors and regulators. Questions include whether Deutsche Bank can remain independent rather than be pressured into a merger with Commerzbank.
Many investors fear that such a deal, complicated under the best of circumstances, would saddle the combined bank with integration headaches for years to come. A tie-up, investors and analysts say, would generate savings at a heavy price, including thousands more job cuts.
Both banks already have been restructuring and cutting tens of thousands of employees for several years.