CRZBY Commerzbank Ag (PK)

By Jenny Strasburg 

Deutsche Bank AG reported a EUR3.15 billion ($3.51 billion) net loss in the second quarter, reflecting the pain of a global revamp and a large restructuring charge that wiped out what would have been a modest profit.

Germany's biggest bank, which is in a prolonged struggle to stabilize its business, said it booked a EUR3.4 billion restructuring charge in the quarter, higher than the EUR3 billion it previously expected. Excluding the charge, second-quarter profit was EUR231 million, slightly higher than its preliminary estimate earlier this month when it revealed its reorganization plans.

Shares in the lender were trading 5% lower in Frankfurt on Wednesday morning, at around EUR6.77, before recovering partially.

Executives at the German bank say a sweeping overhaul will pay off in coming years through a leaner, more focused lender. The bank said it expects a full-year loss and a revenue drop from 2018.

"This decline is mainly due to our decision to exit substantially all of our equities sales and trading business," the bank said in a statement.

Deutsche Bank is curtailing its global ambitions through plans to cut 18,000 jobs and largely retreat to its core European market. For years, the lender experienced difficulties competing in core trading businesses, deal advising and other areas where European banks have fallen behind stronger American rivals.

The bank's challenges are exacerbated by legal and compliance woes and a low-margin retail market in Germany. Chronically low or negative interest rates have weighed heavily on continental lenders.

Last quarter's sharp drop in trading revenue -- down 12% across the securities business -- and lower deal-advisory fees contributed to a EUR900 million pretax loss in the investment bank. All but EUR97 million of that loss came from restructuring charges. Executives said a substantial part of the revenue declines were a natural result of the bank's narrowing scope of business. Analysts say investors need convincing.

"Excluding transformation charges the bank would be profitable, and in our more stable businesses revenues were flat or growing," Chief Executive Christian Sewing said in a statement Wednesday.

Still, the transaction-banking unit that finances clients' trade flows and manages companies' cash, where Deutsche Bank is spending money to expand, had a disappointingly flat quarter. Its revenue was unchanged when accounting for a one-time boost a year earlier, far from the lofty revenue increases the bank said it would deliver.

Deutsche Bank said the big second-quarter charge will help position it for growth because it represents a "substantial portion" of the total costs expected from its multiyear restructuring. Through 2022, the restructuring will cost a total of about EUR7.4 billion, Deutsche Bank said this month.

As layoffs mount, severance expenses will too. Analysts say Deutsche Bank faces a difficult challenge balancing cost-cutting with the high price of the overhaul, which will strain its capital cushion. Executives say they believe they can shoulder those costs without asking shareholders to pony up more cash.

The bank posted EUR6.2 billion in net revenue in the second quarter, slightly lower than the EUR6.3 billion average expected by analysts and down 6% from a year earlier. Investment-banking revenue fell 18% from a year earlier, while revenue at the smaller asset-management unit rose 6%. In the retail banking division, which includes the private-banking business, revenue fell 2%.

The restructuring has led to both planned and unplanned departures across businesses, which started well before the bank's formal unveiling of its reorganization. More than 900 people have received notice they are being fired or their jobs are being cut, the bank said Wednesday.

The bank has reorganized its management under Mr. Sewing. Several top executives, including the head of the investment bank, are leaving and the CEO is taking over supervision of that division, which is the bank's most important revenue engine.

The lender created a so-called bad-bank division, called the Capital Release Unit, to sell or wind down nearly EUR300 billion in assets including derivatives contracts that can't be disposed of easily. The process is expected to take several years.

As part of the shrinkage, Deutsche Bank is dismantling chunks of its Wall Street operations, built over more than 20 years. It is peddling portfolios of equity derivatives and other holdings to rival banks and said it is on track to sell big portions of an electronic-trading and prime-brokerage business serving hedge funds to BNP Paribas SA.

Calling the moves a "fundamental rebuilding of Deutsche Bank," Mr. Sewing promised to shed businesses where the lender has failed to compete, including equities trading. Investors have called for the bank to lop off money-losing operations after years of persistent share declines and strategic rethinking.

Earlier and shallower cuts failed to stabilize profits for the 149-year-old lender. In April, talks with smaller German rival Commerzbank AG ended without a deal, raising fresh questions about Deutsche Bank's direction.

--Pietro Lombardi contributed to this article.

Write to Jenny Strasburg at jenny.strasburg@wsj.com

(END) Dow Jones Newswires

July 24, 2019 05:56 ET (09:56 GMT)

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