Deutsche Bank already preparing to pay bonuses under Christian Sewing

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Deutsche Bank Q2

Deutsche Bank's second quarter results are out. If you're in the investment bank, they're mixed. As the chart below shows, Deutsche did comparatively well in M&A but comparatively badly in fixed income currencies and commodities. However, there's good news for employees: bonus accruals in the corporate and investment bank were up €70m in the second quarter and €110m in the first half. Questions are being asked about the bank's strategy.

In the call accompanying today's results, CEO Christian Sewing stood by his plan for the CIB.  The 14% year-on-year decline in fixed income revenues was the result of lower credit trading revenues, lower rates revenues in Europe and slightly lower revenues in FX, said CFO James von Moltke. Sewing said Deutsche's fixed income market share has stabilized after cuts to risk weighted assets and leverage exposure, and that the bank plans to "redeploy" part of its capital base to help expand credit trading in future.

Curiously, Deutsche Bank's equities sales and trading revenues fell less, despite a 40% reduction in risk weighted assets to the area. The bank cited strong increases in prime broking revenues, despite (or maybe because of) the bank jettisoning peripheral prime broking clients and some prime broking staff.

[Hover over the chart to see the results by bank]

Analysts weren't entirely happy with Deutsche's efforts. Kian Abouhossein, J.P. Morgan's top banking analyst, pointed out that J.P. Morgan's year-on-year changes were a "bit weaker than peers" and that the CIB's return on equity, at just 3.1% (down from 3.6%) in the second quarter was peculiarly low. "Is there some kind of a problem in the cost base that needs to be reduced significantly more?" asked Abouhossein. "How many people do you actually need to run the investment bank?"

For the moment, the answer seems to be 39,081 people and 17,179 in the front office. Deutsche cut 1,182 people from the corporate and investment bank in the second quarter, of whom 942 came out of the front office. However, there are another 5,000 cuts to come across entire bank by the end of 2019 and Von Moltke said it's envisaged that the investment bank will need fewer human beings long term as technology investments reduce the need for employees.

The good news is that Deutsche employees who survive could get paid more. Accrued compensation per head at Deutsche's investment was up 10% in the second quarter under Sewing, to €271k. Von Moltke said this reflects the bank's intention to continue paying at the level of 2017's (generous) bonuses. Last year's bonuses were entirely accrued in the final quarter, but this year's bonuses are being accrued at a similar level throughout the year, said Von Moltke. As a result, Deutsche's bonuses accruals were up €70m in the second quarter and €110m in the first half. Faster vesting of equity stock bonuses contributed to the rise.

In theory, therefore, Sewing's Deutsche Bank should be a place of greater efficiency and higher pay. In reality, the bank needs to stabilize revenues and to increase its return on equity to justify paying staff generously. It doesn't help that other costs are waiting in the wings: there will be "significant" MiFID II implementation costs in the second half, said Von Moltke. There's also the need to spend on technology - as other banks increase their tech spend, Deutsche's IT investment fell slightly year-on-year in the second quarter. The bank may yet need to put more aside if it wants to stay in the tech race.

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