LONDON — British bank Barclays on Thursday reported £1.6 billion ($2 billion) net profit attributable to shareholders for the third quarter, beating expectations.
The result compared with the £1.17 billion net profit forecast in an LSEG poll of analysts and was 23% higher than the same period in 2023.
Revenue for the period came in at £6.5 billion, slightly ahead of a forecast of £6.39 billion.
Barclays shares opened 2% higher in London.
The lender’s return on tangible equity rose to 12.3% from 9.9% in the second quarter, as its CET1 ratio — a measure of solvency — rose to 13.8% from 13.6%.
Earlier this year, Barclays announced a strategic overhaul in an effort to cut costs, boost shareholder returns and stabilize its long-term financial performance, placing more focus on domestic lending while reducing costs at its more volatile investment banking unit. That strategy has included the acquisition of U.K. retail banking business Tesco Bank.
In the second quarter, Barclays net profit fell slightly year-on-year amid lower income at its U.K. consumer bank and corporate bank, as net profit jumped 10% at its investment bank.
Those gaps closed in the third quarter, with domestic bank income up 4%, with the lender raising its annual forecast for U.K. retail net interest income to £6.5 billion from £6.3 billion. Corporate bank income was 1% higher due to a rise in average deposit balances, while investment banking income gained 6%.
Amid declines, income at Barclays’ private U.S. consumer bank dipped 2% year-on-year as its wealth management unit fell 3%.
Barclays CEO C. S. Venkatakrishnan told CNBC on Thursday the results showed the bank was on track to meet the targets it had set out in February.
“We are guiding upwards in our net interest income, and we’ve had two continuous quarters of NII expansion in our business in the U.K. So we’re guiding up, both for the U.K. business and for the bank as a whole, and then we see costs very much under control.”
The bank now sees group NII of above £11 billion for full-year 2024, from a previous outlook of £11 billion.
Barclays shares have soared 55% in the year to date after dipping in 2023.
Several banks have announced plans to restructure, streamline operations and cut costs as they face a potential weakening of net interest margins as interest rates fall. HSBC earlier this week said it would consolidate its operations into four business units.
“What I would say on interest rates is, Barclays has had a very disciplined approach to interest rate management, and so we’ve got this thing called the structural hedge, which is a way of smoothing out the effects of interest rates on our income, and that’s part of what is causing our NII expansion over the last couple of quarters. So we are pretty well protected against changes in interest rates in the near term,” Venkatakrishnan said.
Deutsche Bank kicked off the third-quarter reporting season on Wednesday, posting higher-than-expected net profit as revenue at both its investment bank and asset management divisions jumped 11% year-on-year.
Deutsche Bank offices in the City of London on July 2, 2024, in London, U.K.
Mike Kemp | In Pictures | Getty Images
Cologne’s higher regional court on Wednesday ruled against Deutsche Bank in a long-standing legal dispute with shareholders who alleged the lender underpaid in its multi-stage acquisition of German retail bank Postbank.
The 13 plaintiffs in the case claimed that Postbank, which Deutsche Bank acquired over several interest purchases from Deutsche Post, was worth more than the 25 euros ($27) per share paid in 2010.
The investors, 13 plaintiffs who are former shareholders of Deutsche Postbank (Postbank), instead held they were entitled to a significantly higher payment of 57.25 euro per share — the price at which Deutsche Bank bought its initial 30% stake in Postbank, mere days before the collapse of Lehman Brothers and the kickoff of the global financial crisis, which waylaid the takeover.
Deutsche Bank and Postbank finally merged in 2018.
Legal suits linked to the transaction have cast a long shadow over the financial prospects of Deutsche Bank, dampening its performance as recently as in the second quarter — when the lender ended its 15-quarter profit streak and booked a loss of 143 million euros on the back of a 1.3-billion-euros provision linked to the Postbank proceeding.
Deutsche Bank later reached settlements with nearly 60% of plaintiffs in the case in August.
Earlier in the Wednesday session, the lender reported the release of 440 million euros of litigation provisions in the third quarter, which helped it swing back to a better-than-expected net profit attributable to shareholders of 1.46 billion euros ($1.58 billion) over the period.
Deutsche Bank said it will now analyze the Wednesday judgement and noted it has booked provisions covering all outstanding claims by the plaintiffs, including interest accrued to date.
“The Court has not allowed a further appeal to the German Federal Court. Deutsche Bank will assess if to file a non-admission complaint (motion for leave to appeal) after receiving the written reasoning for the decision,” a Deutsche Bank spokesperson said.
The lender’s shares were down 2.3% at 10:58 a.m. London time.
— CNBC’s Sophie Kiderlin contributed to this report.
The Commerzbank building (second from right) in Frankfurt am Main, western Germany, on Sept. 25, 2023.
Kirill Kudryavtsev | Afp | Getty Images
UniCredit‘s move to take a stake in German lender Commerzbank is raising questions on whether a long awaited cross-border merger could spur more acquisitions and shake up the European banking sector.
Last week, UniCredit announced it had taken a 9% stake in Commerzbank, confirming that half of this shareholding was acquired from the government. Berlin has been a major shareholder of Commerzbank since it injected 18.2 billion euros ($20.2 billion) to rescue the lender during the 2008 financial crisis.
UniCredit also expressed an interest in a merger of the two, with the Italian bank’s CEO Andrea Orcel telling Bloomberg TV that “all options are on the table,” citing the possibility that it either takes no further action or buys in the open market. Commerzbank has given a more lukewarm response to the merger proposals.
Orcel said the Italian bank was able to buy 4.5% of the state’s stake in Commerzbank because the government trusts UniCredit, Reuters reported Thursday citing local media. When asked if UniCredit would launch an unsolicited tender offer to buy out other investors in Commerzbank, the CEO told the Italian paper: “No, it would be an aggressive move.”
But analysts have welcomed the move by UniCredit, particularly because a tie-up might spur similar activity in Europe’s banking sector — which is often seen as more fragmented than in the U.S., with regulatory hurdles and legacy issues providing obstacles to mega deals.
So far, the market has responded positively to UniCredit’s move. Commerzbank shares jumped 20% on the day UniCredit’s stake was announced. Shares of the German lender are up around 48% so far this year and added another 3% on Wednesday.
Investors appreciate the geographical overlap between the two banks, the consistency in financials and an assumption that the transaction is “collaborative” in nature, UBS analysts, led by Ignacio Cerezo, said in a research note last week. According to UBS, the ball is now in Commerzbank’s court.
Analysts at Berenberg said in a note last week that a potential merger deal, “should, in theory, have a limited effect on UniCredit’s capital distribution plans.” They said that while there is “strategic merit” in a deal, the immediate financial benefits might be modest for UniCredit, with potential risks from the cross-border deal diminishing some of the benefit.
David Benamou, chief investment officer at Axiom Alternative Investments, hailed Orcel’s decision to take a stake in Commerzbank as a “fantastic move” that makes sense because of the increase in German market share it would grant UniCredit.
As Commerzbank “missed on costs in Q2 [the second quarter], currently it’s at a very low valuation, so the moment [Orcel] stepped in, is probably one of the best moments he could have,” Benamou told CNBC’s “Squawk Box Europe” last week.
When asked how imminent a takeover was in the short term, Benamou suggested it was possible, saying, “they will probably come to it.”
According to Arnaud Journois, senior vice president of European Financial Institution Ratings at Morningstar DBRS, UniCredit is already on its way to becoming a leading bank in Europe.
He told CNBC’s “Street Signs Europe” Wednesday that there was a “double logic” behind UniCredit’s move as it enables the Italian lender to access both the German and Polish markets where Commerzbank currently operates.
“UniCredit has been very active in the past two years, doing a few targeted acquisitions … So this is the next logical step,” Journois said.
UniCredit continues to surprise markets with some stellar quarterly profit beats. It earned 8.6 billion euros last year (up 54% year-on-year), also pleasing investors via share buybacks and dividends.
Analysts are hoping that a move by UniCredit will encourage more cross-border consolidation. European officials have been making more and more comments about the need for bigger banks. French President Emmanuel Macron, for example, said in May in an interview with Bloomberg that Europe’s banking sector needs greater consolidation.
“European countries might be partners, but they are still competing sometimes. So, I know that from an EU standpoint — policymaker standpoint — there is appetite for more consolidation to happen. However, we think that there are a few hurdles that make that difficult, especially on the regulatory side,” Journois told CNBC.
A cross-border styled merger between UniCredit and Commerzbank would be more preferential than a domestic merger between Deutsche Bank and Commerzbank, according to Reint Gropp, president of the Hall Institute for Economic Research.
“The German banking structure is long overdue for a consolidation process. Essentially, Germany still has almost half of all banks in the euro zone, that’s significantly more than its share in GDP. So any consolidation process would be welcome now,” Gropp told CNBC’s “Street Signs Europe” on Wednesday.
He noted that Commerzbank has always been a “big candidate for a takeover” in the German banking sector because most of the other banks in the country are savings banks which cannot be taken over by private institutions, or cooperative banks which are also difficult takeover targets.
Filippo Alloatti, head of financials at Federated Hermes, said Deutsche Bank is unlikely to present a strong rival offer for Commerzbank.
With a CET1 ratio of 13.5% compared to its target of 13%, Deutsche Bank is rather “limited.” CET ratios are used to gauge the financial strength of a lender. The German bank also has less excess capital than UniCredit and therefore “cannot really afford” a takeover, Alloatti said.
“We’ve been waiting for this,” Alloatti said, speaking about the potential for further consolidation in the sector. “If they [UniCredit] are successful, then of course, other management teams will study this case,” he said, noting that there was also scope in Italy for domestic consolidation.
Gropp acknowledged that UniCredit’s CEO had made a “very bold move” that caught both the German government and Commerzbank by surprise.
“But maybe we need a bold move to effect any changes at all in the European banking system, which is long overdue,” he said.
In comments reported by Reuters, Commerzbank’s Chief Executive Manfred Knof told reporters on Monday that he would look at any proposals from UniCredit in line with the bank’s obligations to its stakeholders.
Knof informed the bank’s supervisory board last week that he would not seek an extension of his contract which runs until the end of 2025. German newspaper Handelsblatt reported that the board might be considering an earlier change of leadership.
The supervisory board at Commerzbank will meet next week to discuss UniCredit’s stake, people familiar with the matter who preferred to remain anonymous told CNBC. There are no plans to replace Knof as soon as that meeting, the sources added.
– CNBC’s Annette Weisbach, Silvia Amaro and Ruxandra Iordache contributed to this report.
UniCredit CEO Andrea Orcel during an interview at the World Economic Forum (WEF) in Davos, Switzerland, on Jan. 18, 2024.
Bloomberg | Bloomberg | Getty Images
UniCredit‘s CEO Andrea Orcel revealed his hand this week as the Italian lender built a 9% stake in Commerzbank — and a takeover bid for the German rival could still be in the cards.
UniCredit faces a number of hurdles before increasing its stake after filing a request to “potentially exceed 9.9% of Commerzbank if and when necessary.” Commerzbank shares soared on Wednesday when news of UniCredit’s position was announced, and compounded gains on Thursday following speculation of an imminent takeover.
“All the options are on the table,” Orcel said Thursday in a Bloomberg TV interview, stressing that “it’s very simple to engage with all the stakeholders and see if the basis for a combination is there. And if it’s not, and it is the basis for sponsoring or propelling further Commerzbank in delivering a … transformation, then we will have delivered a lot of value for our shareholders as well.”
Roughly half of UniCredit’s freshly acquired stake was purchased from Commerzbank’s largest shareholder, the German government, which is seeking to gradually exit its position after injecting 18.2 billion euros ($20.05 billion) to prop up the bank during the 2008 financial crisis. The authorities, which retain a 12% shareholding, last week said that around 13.15 billion euros of the rescue sum had been repaid to date.
All eyes are now on whether UniCredit will make the leap when the German government returns to offload its shares into the market.
“There is the possibility that the government sells down further. We would be interested, at the right terms,” Orcel said Thursday. “There is the possibility that we buy in the open market. Or there is the possibility that we do nothing. But unless we ask for the authorization first, we don’t have that flexibility.”
The Italian bank already has a presence in Germany through its Munich-based lender HypoVereinsbank. In a Thursday note, Berenberg analysts stressed that a Commerzbank takeover would fit with Orcel’s broader expansion strategy and create Germany’s second-largest bank, with a market share of roughly 8% of customer loans.
“UniCredit has always seen itself as a pan-European bank and its CEO wants this to remain the case,” they said. “Expanding its presence in countries where it already has an operation is therefore compatible with this goal.”
UniCredit took a similar cross-border step last year, when it purchased a nearly 9% stake of Alpha Bank from the state-owned Hellenic Financial Stability Fund, although it has yet to make any more moves targeting the Greek bank.
Until recently, Germany’s largest lender Deutsche Bank had been seen as the prime contender to take over Commerzbank, following an abrupt collapse of initial talks in 2019. Whispers cooled in January, however, when Deutsche Bank CEO Christian Sewing said that merger and acquisition activity was not a priority for the group at the time.
A UniCredit takeover of Commerzbank would emerge as a rare, if long-awaited, instance of consolidation among Europe’s banking titans. The resource-intensive and time-consuming process is often stymied by regulatory hurdles and limits on large exposures.
Orcel, however, is angling in on Commerzbank at “probably one of the best moments he could have,” according to David Benamou of Axiom Alternative Investments.
“It’s a fantastic move, financially,” Benamou told CNBC’s Steve Sedgwick on Thursday.
He noted that the stock building comes when Commerzbank has yet to validate its August share buyback plan involving a first tranche of 600 million euros, or roughly 3.3% of its market capitalization as of Thursday, with the European Central Bank — meaning the scheme is not yet fully priced into the German bank’s “very low” valuation.
Analysts from Berenberg added that a potential acquisition of Commerzbank would “materially” reduce the odds of UniCredit pursuing domestic consolidation in Italy — where the lender backed out of talks with the world’s oldest bank, Monte dei Paschi, in 2021.
Additionally, “UniCredit would have to navigate through potential political and trade union objections about the deal, which could limit the value extraction from this acquisition. Lastly, as the combined entity would be a bigger and more complex bank, it could be faced with increased capital requirements,” Berenberg said.
Already, Commerzbank is seeking to fend off a potential acquisition, Reuters has reported, while Frank Werneke, the head of one of Germany’s largest trade unions Verdi, called on the German government to retain its share in Commerzbank “until further notice in order to avert a takeover,” according to a Google-translated statement.
Big banks are jumping headfirst into the AI race. Over the past year, Wall Street’s largest names — including Goldman Sachs , Bank of America , Morgan Stanley , Wells Fargo to JPMorgan Chase — ramped up their generative artificial intelligence efforts with the aim of boosting profits. Some are striking deals and partnerships to get there quickly. All are hiring specialized talent and creating new technologies to transform their once-stodgy businesses. The game is still in its early innings, but the stakes are high. In his annual shareholder letter, JPMorgan CEO Jamie Dimon compared artificial intelligence to the “printing press, the steam engine, electricity, computing, and the internet.” The banks that can get it right should increase productivity and lower operational costs — both of which would improve their bottom lines. In fact, AI adoption has the potential to lift banking profits by as much as $170 billion, or 9%, to more than $1.8 trillion by fiscal year 2028, according to research from Citi analysts . Early-stage generative AI use cases are often for “augmenting your staff to be faster, stronger and better,” said Alexandra Mousavizadeh, co-CEO and co-founder of AI benchmarking and intelligence platform Evident Insights. “Over the course of the next 12 to 18 to 24 months, I think we’re going to see [generative AI] move along the maturity journey, going from internal use cases being put into production [to more] testing external-facing use cases.” Companies are only just starting to grasp the promise of this tech. After all, it was only following the viral launch of ChatGPT in late 2022 that the world outside of Silicon Valley woke up to the promise of generative AI. OpenAI’s ChatGPT, backed by Microsoft and enabled by Nvidia chips, sparked an investor stampede into anything AI. The AI trade also pushed corporate boardrooms in three ways: find use cases for the tech, strike partnerships to enable it, and hire specialized employees to build and support it. MS YTD mountain Morgan Stanley YTD AI use cases for key businesses Morgan Stanley was among the first on Wall Street to publicly embrace the technology, unveiling two AI assistants for financial advisors powered by OpenAI. Launched in September 2023, the AI @ Morgan Stanley Assistant gives advisors and their staff quick answers to questions regarding the market, investment recommendations, and various internal processes. It aims to free up employees from administrative and research tasks to engage more with their clients. Morgan Stanley this summer rolled out another assistant , called Debrief, which uses AI to take notes on financial advisors’ behalf in their client meetings. The tool can summarize key discussion topics and even draft follow-up emails. “Our immediate focus is on using AI to increase the time our employees spend with clients. This means using AI to reduce time-consuming tasks like responding to emails, preparing for client meetings, finding information, and analyzing data,” said Jeff McMillan, head of firmwide AI for Morgan Stanley. He made these comments in a statement emailed to CNBC last week. “By freeing up this time, our employees can focus more on building relationships and innovating.” In the long run, AI could help Morgan Stanley’s wealth business get closer to reaching management’s goal of more than $10 trillion in client assets . In July, the firm reported client assets of $7.2 trillion. To be sure, McMillan said in June it would take at least a year to determine whether the technology is boosting advisor productivity. If it does, that would welcomed news for shareholders after Morgan Stanley’s wealth segment missed analysts’ revenue expectations in the second quarter . WFC YTD mountain Wells Fargo YTD It’s not just Morgan Stanley. Our other bank holding Wells Fargo has its own virtual AI assistant. Dubbed Fargo , it helps retail customers get answers to their banking questions and execute tasks such as turning on and off debit cards, checking credit limits, and offering details for transactions. Fargo, powered by Google Cloud’s artificial intelligence, was launched in March 2023. For a large money center bank like Wells Fargo — one that’s historically catered to Main Street — the Fargo assistant could bolster the bank’s largest reporting segment. The consumer, banking and lending unit in the second quarter accounted for roughly 43% of the $20.69 billion booked in companywide revenue. Striking AI deals, landing partnerships None of this would be possible without partnerships. Big banks have tapped startups and tech behemoths alike for access to their large language models (LLMs) to build their own AI products. In addition to Morgan Stanley’s OpenAI deal and Wells Fargo’s ties with Google, Deutsche Bank also partnered with Club name Nvidia in 2022 to help develop apps for fraud protection . BNP Paribas announced on July 10 a deal with Mistral AI — often seen as the European alternative to OpenAI — to embed the company’s LLMs across its customer services, sales and IT businesses. Shortly after that, TD Bank Group signed an agreement with Canadian AI unicorn Cohere to utilize its suite of LLMs as well. “We watch out for these [deals] because that means they are onboarding a lot of that capability,” Evident’s Mousavizadeh said. Big AI hires for top Wall Street firms Banks have also had to do a lot of hiring to make their AI dreams come true — poaching swaths of data scientists, data engineers, machine learning engineers, software developers, model risk analysts, policy and governance managers. Despite layoffs across the banking industry, AI talent at banks grew by 9% in the last six months, according to July data from Evident , which tracks 50 of the world’s largest banks. That was double the rate of growth seen in total headcount across the sector. Mousavizadeh said that one of the major “characteristics of the leading banks in AI is that they’re not stopping hiring. The leading banks are the [ones] that are hiring the most AI talent.” In July, Wells Fargo named Tracy Kerrins as the new head of consumer technology to oversee the firm’s new generative AI team. And Morgan Stanley’s McMillan was promoted to AI head in March after serving as a tech executive in the wealth division. He’s helped oversee Morgan Stanley’s OpenAI-related projects. JPMorgan last year also appointed Teresa Heitsenrether as its chief data and analytics officer in charge of AI adoption. Bottom line The more we see these firms spend and invest in AI talent, the more serious they appear to be about the future of the nascent tech. We don’t expect these third-party partnerships, new use cases, and slew of hires to create exponential returns overnight. However, As long as these costs don’t outweigh return on investment (ROI), we’re happy with Wells Fargo and Morgan Stanley’s moves to innovate. “We’re very much in the foothills of this, and we’re going to see much more ROI generated off the AI use cases in 2025,” Mousavizadeh said. “But, I think you’re going to see a real tipping point in 2026.” (Jim Cramer’s Charitable Trust is long NVDA, WFC, GOOGL, MSFT, MS. See here for a full list of the stocks.) 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Pedestrians walk along Wall Street near the New York Stock Exchange (NYSE) in New York, US, on Tuesday, Aug. 27, 2024.
A logo stands on display above the headquarters of Deutsche Bank AG at the Aurora Business Park in Moscow, Russia.
Andrey Rudakov | Bloomberg | Getty Images
Deutsche Bank has reached settlements with nearly 60% of plaintiffs in a long-running case alleging the German lender underpaid for its acquisition of Postbank more than a decade ago.
In a Wednesday statement, Deutsche Bank said it had reached agreements with more than 80 plaintiffs for a settlement of 31 euros ($34.53) per share, as proposed by the bank. This will allow Germany’s largest lender to release the funds and boost Deutsche Bank’s anticipated third quarter pre-tax profit by 430 million euros, it said.
Deutsche Bank shares were 2.96% higher at 11:48 a.m. in London, around their highest level for a month.
Shares dropped sharply following the bank’s second-quarter results released July 24, in which it reported its first net loss in four years, largely due to a 1.3 billion euro ($1.45 billion) provision for Postbank cases.
That includes the largest individual plaintiff representing around a third of claims, the bank said Wednesday.
Suits were brought against Deutsche Bank by a range of institutional and private investors claiming that it underpaid in its multi-stage acquisition of Postbank, a German retail bank with millions of clients. The institutions merged in 2018.
Deutsche Bank share price.
“Should Deutsche Bank enter into settlement agreements with additional plaintiffs, this could result in further positive implications on the total provisions taken for the litigation,” Deutsche Bank said.
The claims have been hanging over the bank for more than 10 years. The Higher Regional Court of Cologne in 2020 dismissed all claims in the proceedings, but this ruling was set aside by Germany’s Federal Court of Justice in 2022 and sent back to the Higher Regional Court for a new decision.
A chunk of claims remain outstanding.
Jan Bayer, senior partner at the law firm Bayer Krauss Hueber representing around 50 predominantly institutional claimants, said his clients had rejected the settlement. Bayer last week called an offer of 36.5 euros per Postbank share a “late low ball.”
Bayer told CNBC on Thursday the acceptance had “no effects on any other claimant.”
Analysts at JP Morgan said in a Thursday note that they estimated the settlement would add around 10 basis points to Deutsche Bank’s Common Equity Tier 1 capital — a measure of bank solvency — which was 13.5% at the end of the second quarter.
“Overall, we see the settlement as a positive, moving in the direction of removing a long outstanding litigation matter,” they said.
They added that they did not assume the settlements would lead to a second tranche of share buybacks this year, which the bank previously announced in its second-quarter results that it was unlikely to make.
Deutsche Bank “would need to show ongoing capital generation for the market to get comfortable with increased payout, also given some overhangs such as the [European Central Bank]’s industry-wide leveraged finance review,” JP Morgan said.
A Deutsche Bank branch in the financial district of Frankfurt, Germany, on May 6, 2022.
Alex Kraus | Bloomberg | Getty Images
A lawyer representing plaintiffs in a long-running case against Deutsche Bank on Friday slammed a proposed settlement from the German lender as a “late low ball” offer.
The crux of the challenge against Deutsche Bank is that it underpaid for its acquisition of German retail banking giant Postbank in the late 2000s.
Legal action over the multi-stage deal has been rumbling on since 2010. Claimants number in the hundreds in total, with various suits in process from both institutional and private investors.
Deutsche Bank on Thursday afternoon offered claimants a settlement of 36.50 euros ($40.12) per Postbank share, Jan Bayer, senior partner at law firm Bayer Krauss Hueber, told CNBC. Claimants have until Monday to respond.
A hearing on the Postbank case is due to take placeat the at the Higher Regional Court in Cologne on Wednesday.
“This tactic (a late low ball roll-over offer) has been planned for months despite statements of the bank to the contrary and our warning months ago that it bears the risk of not working,” Bayertold CNBC by email.
He added that the offer was subject to acceptance by all claimants, one of whom had already rejected it. This implies that the settlement deal is unlikely to go through, unless conditions change.
“The bank’s goal of avoiding the court decision on Wednesday is doomed, and any settlement seems remote,” Bayer said, adding that the timing of an “unannounced offer… in the middle of the holiday season” meant the law firm was not even certain it could contact all claimants by the deadline.
Bayer Krauss Hueber is representing around 50 predominantly institutional claimants in various proceedings surrounding the case, who Bayer saidare making around 1 billion euros in claims.
A Deutsche Bank spokesperson told CNBC by email on Friday: “As we’ve stated in the past, we are in settlement discussions with various groups of plaintiffs within the several Postbank takeover proceedings. We cannot comment further on the status of these talks.”
The Postbank litigation has weighed on the recent performance of Germany’s biggest lender.In its second-quarter results published last month, Deutsche Bank reported a net loss attributable to shareholders for the first time in four years, largely due to a 1.3 billion euro provision it made for Postbank cases. Deutsche Bank shares tumbled on the news at the time, but are up nearly 12% in the year to date as of Friday, according to LSEG data.
In a previous lengthy statement on the case released in April, Deutsche Bank said the assertion of plaintiffs — that the bank was obligated to make a takeover offer at a higher price — had been “successfully disputed” adding that the lender believed this claim was “invalid.”
The Higher Regional Court of Cologne in 2020 dismissed all claims in the proceedings, but this ruling was set aside by Germany’s Federal Court of Justice in 2022 and sent back to the Higher Regional Court for a new decision.
Deutsche Bank on Wednesday snapped a 15-quarter profit streak with a narrower-than-expected loss, as it made a provision for an ongoing lawsuit over its Postbank division and confirmed it would not make a second share buyback this year.
Shares provisionally ended the session down more than 8%, despite analysts characterizing the results as broadly solid.
Deutsche Bank share price.
Net loss attributable to shareholders was 143 million euros ($155.1 million), against an LSEG poll of analysts which had predicted a loss of 145 million euros.
Germany’s biggest bank had previously flagged it would take a hit in the quarter on the back of the Postbank provision, which it confirmed Wednesday would amount to 1.3 billion euros. The long-running lawsuit by investors alleges Deutsche Bank underpaid to take over the retail banking giant in 2010.
The bank said it remained on track with its distribution commitment to shareholders, which it has previously stated is for a sum in excess of 8 billion euros in share buybacks across the 2021-2025 financial year period.
“On the share repurchase side…unfortunately, prudently we had to step back from the idea of a second repurchase this year, what our focus is now is building excess capital through the back of the year,” Chief Financial Officer James von Moltke told CNBC’s Caroline Roth in a Wednesday interview.
The lender reported net revenue was up 2% to 7.6 billion euros in the second quarter, while efficiency savings reached 1.5 billion euros.
Revenue reports varied across the business. At its investment bank division, a recent area of strength, they jumped 10% year-on-year to 2.6 billion euros — but fell 3% to 2.1 billion euros in fixed income and currencies. Revenue in corporate banking was nearly flat at 1.9 billion euros.
Other highlights included:
Profit before tax excluding the Postbank provision was 1.7 billion euros, up from 1.4 billion euros in the second quarter of 2023.
Provision for credit losses was 476 million euros, up from 401 million euros a year ago.
CET 1 capital ratio, a measure of bank solvency, nudged up to 13.5% from 13.4% in the first quarter of the year.
In a Wednesday note, Citi analysts called it a “solid quarter,” with some divisions above consensus, net interest margins fading at a slower pace than initially expected and a largely-unchanged outlook for 2024 and 2025.
RBC analysts labelled the results “good,” particularly in investment banking, but said loan losses were higher than expected.
Deutsche Bank’s Von Moltke told CNBC he saw several positive drivers for the second half, including in net interest income — which fell 2% in corporate banking the second quarter, according to the Wednesday earnings.
“We had called earlier this year on the net interest income side for a downdraft relative to [20]23, we actually think the banking book segments may be stable, essentially flat to last year, and that’s actually very encouraging, reflecting lower funding costs, better spreads on both the deposit and the loan side. Still more sluggish loan growth than we’d like to see, but overall an encouraging picture,” Von Moltke said.
“On the financial market and corporate finance side, we see the momentum there coming through that we’d hoped to see,” he added, pointing to revenue doubling in its origination and advisory business year-on-year.
The second-quarter result maintains a recent trend of earnings beats for the lender. Back in April, the bank posted 10% higher profit, logging its best quarterly result for the metric since 2013.
Deutsche Bank incorrectly disclosed deferred tax assets in its 2019 financial statement which did not meet international accounting standards, the German regulator BaFin said on Tuesday.
“The declarations on deferred tax assets in the consolidated financial statement were not complete,” the regulator, known formally as the Federal Financial Supervisory Authority, said in a statement translated by CNBC.
It said that 2.076 billion euros ($2.26 billion) worth of deferred tax assets had not been disclosed separately in the notes for Deutsche Bank’s U.S. business. The bank should have made the disclosure because it recorded several years of losses, it said.
Additionally, the bank should have explained why it was sure that it would make sufficient profits in the future, which it also did not do, BaFin said.
The disclosure error was against rules laid out by the International Accounting Standards, BaFin said in a second statement.
The findings are the outcome of a random sampling examination, which was initially launched by Germany’s now defunct Financial Reporting Enforcement Panel, the regulator noted.
In a statement to CNBC, Deutsche Bank said the financial statement was still compliant with international reporting standards.
“There is no suggestion on BaFin’s part that there is any inaccuracy in Deutsche Bank’s 2019 accounts, and no restatement or other action is required. It is Deutsche Bank’s view today, as at the time of publication, that its 2019 financial statements and other disclosures comply fully with IFRS [International Financial Reporting Standards] requirements,” a spokesperson for the bank said in emailed comments.
Deferred tax assets are figures on a company’s financial statements that effectively reduce its taxable income in the future, for example related to a previous overpayment or advance payment of taxes.
The disclosure of them is important for transparency about expected future tax implications, BaFin noted.
Europe-traded shares of Deutsche Bank were last down by 0.9% on Tuesday morning.
LONDON — British fintech firm Zilch said Wednesday it’s raised $125 million in debt financing from German banking giant Deutsche Bank in a deal that will help the company triple sales in the next couple of years and move closer toward an initial public offering.
The company, which offers shoppers the ability to purchase items and pay off the debt they owe in monthly, interest-free installments, said the debt was structured as a securitization, where multiple loans can be packaged together.
Zilch initially sourced credit for its installment plans and other loans from Goldman Sachs‘s private credit arm. The company said the deal with Deutsche Bank came with more flexible terms and would enable it to draw down up to $315 of credit in total — including from different banks.
Philip Belamant, Zilch’s CEO and co-founder, noted the terms of its arrangement with Goldman Sachs were beneficial for a young, fast-growing startup — but ultimately too restrictive. Zilch’s capital needs have accelerated as the business has matured, and required a credit arrangement that was more flexible, he said.
“For us, we think it’s a major milestone in the company’s growing stage, which is, we’ve gone through the line we have with Goldman, it’s been a brilliant relationship and partnership,” Belamant told CNBC. “But now we’re stepping it up to securitization … so we [can] continue scaling.”
The additional $190 million of credit will become available to Zilch as the firm continues to grow. Belamant said the firm is already planning to strike agreements with other banks to raise more debt in the coming months.
The move is a sign of how buy now, pay later upstarts are continuing to double down on their products and loan growth, even as larger incumbent players in finance and technology are bowing out of the once-buzzy market.
Belamant said that with additional capital of $125 million, the firm’s path toward an IPO will likely be accelerated, with Zilch currently aiming to go public in the next 12 to 24 months.
The deal will help Zilch generate $3.75 billion of gross sales by 2026, Belamant said.
He explained that for every $1 of debt raised, Zilch can generate $30 of gross merchandise value (GMV) — the combined value of sales processed on its platform.
So, with $125 million of capital, that will drive $3.75 billion of gross sales. Once Zilch has reaches the $315 million maximum funding threshold, it expects to generate nearly $10 billion of GMV by 2026.
Zilch has already generated over £2.5 billion in GMV since its founding in 2018. The firm reported revenues of £30 million ($38 million) in the 12 months ended March 2023. Losses totaled £71.7 million, marginally down from a 2022 loss of £78.3 million.
Zilch has three key ways of making money. The first is through interchange fees, where card networks charge merchants’ bank account each time a consumer makes a payment. The second is commission fees, where merchants pay to appear on Zilch’s app.
Zilch also has an advertising sales network where it provides placements for retailers to promote their wares to consumers. The UK firm claims it is able to achieve conversion rates of up to 55%, more than 10 times higher than the search industry average.
Belamant caveated the firm is keeping a watchful eye on uncertainty around the U.K.’s upcoming election and market conditions more generally.
“It’s hard to obviously say we’re on that range just due to the market, [and] there’s an election happening, [so] obviously we’ll see what happens,” he said.
Wells Fargo is breaking out of its lending roots. The bank has quietly gone on a hiring spree to grab a bigger slice of the profitable investment banking business long dominated by its Wall Street rivals. Since the start of 2023, a CNBC analysis found that Wells Fargo made at least 17 senior-level hires in its corporate and investment banking (CIB) division. Leaning on the expertise of its rivals, many of the newly employed executives previously worked at the likes of JPMorgan Chase and other big banks. Expanding investment banking “improves our outlook” on Wells Fargo stock, according to Jeff Marks, director of portfolio analysis for the CNBC Investing Club. “Adding more fee-related revenues to the overall picture makes the bank’s profits less hostage to the bond market yield curve and could improve the overall return profile of the bank.” He added, “Wells Fargo could fetch a higher multiple in the market as a result.” It’s no wonder CEO Charlie Scharf wants a bigger slice of businesses like investment banking, which garner huge revenue from fees. Services like underwriting for initial public offerings (IPO) and facilitating mergers and acquisitions (M & A) allow banks to take home a percentage of these deals and advisory fees. Fees are a more durable and less volatile revenue stream than what Wells Fargo has historically focused on. This is important because, as Scharf said in the bank’s 2023 annual report , the CIB division has positioned Wells Fargo to “increase our fee-based revenues” and “increase our returns overall.” At the top of the recent hire list, however, is Doug Braunstein, a JPMorgan veteran who was brought in as vice chairman in February to help steer Wells Fargo’s corporate finance and advisory businesses. During nearly 20 years at JPMorgan, Braunstein held many roles including chief financial officer, head of investment banking in the Americas, and head of global mergers and acquisitions. Fernando Rivas was named earlier this month co-CEO of corporate and investment banking at Wells Fargo. Formerly head of North American Investment Banking at JPMorgan, Rivas will lead CIB together with Jonathan Weiss, who had been the sole CEO of the division since February 2020. Weiss, also a JPMorgan alum, has been at Wells Fargo since 2005. Rivas had been at JPMorgan for three decades. In addition to those high-profile hires, CNBC found that Wells Fargo also poached top talent from other financial behemoths such as Barclays , Deutsche Bank , Piper Sandler, and now-defunct Credit Suisse — all within the past year. A Wells Fargo spokesperson declined to comment on the total number of CIB-related hires across all levels in the division. However, Wells Fargo’s Scharf said in the press release announcing Rivas’ hire, “We have added over 50 senior bankers and traders since 2020 and have seen the positive impact with increased revenue and market share.” Break from tradition Management has long relied on interest-based revenue streams like net interest income (NII) from its retail and business customers. NII is the difference between what a firm makes on loans versus what it pays for customer deposits. Wells Fargo and other banks have benefited in recent years as the Federal Reserve began hiking interest rates in March 2022. That’s because the cost of borrowing goes up much more than what customers earn on deposits. However, as rates have stayed higher for longer, customers began to withdraw some of their deposits for higher-yielding offerings like money market funds. Wells Fargo said NII decreased 8% during the first quarter, citing interest rate dynamics. Full-year guidance for NII is also expected to decline in the 7% to 9% range. That’s the double-edged sword of rates, which are now expected to be cut by the Fed later this year, and why Wells Fargo was glad to see its CIB-related investments pay off in the first quarter. The division saw a 1.6% increase in revenue to $4.98 billion. During the April 12 post-earnings conference call, Scharf said the bank is “beginning to see early signs of share and fee growth which will be important as we diversify our revenues and reduce net interest income as a percentage of revenue.” From 2019 to the end of 2023, Wells Fargo’s overall investment banking share moved up two ranks in the U.S. market to No. 6, management said in an annual report , citing Dealogic figures. More recent data indicates that Wells Fargo’s investment banking revenue share globally has jumped to No. 7 from No. 12 year-over-year, as of Tuesday. In the investing banking subset of M & A, Wells Fargo has been garnering more fees. The bank has been tapped for a series of high-profile deals as well, including Kroger ‘s attempted nearly $25 billion acquisition of Albertson’s in October 2022. The transaction is in limbo after the Federal Trade Commission filed a lawsuit to block the merger in February . In IPOs, Wells Fargo was among the lead book-running managers of recent IPOs: cruise line Viking and data management firm Rubrik . Wells Fargo shares, which began their upward trajectory back in November, gained more than 50% in the past 12 months — and about half that gain in 2024 alone. That’s roughly double the S & P 500 ‘s performance on both measures. The stock saw its highest close last week of $62.55 since mid-January 2018. Shares have pulled back a bit since then but remain only about 7.5% away from its all-time high close of $65.93 at the end of January 2018. In recognition of that strength, the Club trimmed its Wells Fargo position in late April and booked a healthy profit on the trade. While still bullish, we wanted to reduce the stock’s overall weighting in a show of portfolio discipline. It was near the 5% threshold that we don’t like exceeding in order to run a diversified portfolio. The Club has a 2 rating on the stock and a $62 price target . WFC mountain 2018-01-26 Wells Fargo since record high close on Jan. 26, 2018 Moving forward Wells Fargo’s CIB expansion bodes well once the firm’s Fed-imposed $1.95 trillion asset cap is gone. Although the timing is uncertain, Wells Fargo secured a key win with regulators in February after the Office of the Comptroller of the Currency terminated a penalty tied to the bank’s 2016 fake accounts scandal. That so-called consent order was believed to be a major factor in the Fed’s decision to cap Wells Fargo’s asset levels in 2017. Those regulatory burdens for past misdeeds at the bank predated Scharf’s tenure who has been clearing them since becoming CEO in 2019. Piper Sandler analyst Scott Siefers has said that Wells Fargo will be able to compete more effectively against other large Wall Street firms once the growth cap is removed. “Wells Fargo on a relative basis is very undersized in businesses such as investment banking,” Siefers told CNBC in March . “So, one part of the investment banking business is being able to commit capital. In other words, put some risk on your balance sheet. But thanks to the asset cap, Wells has not been able to build out its investment bank to the same degree, as have some of its other peers.” (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A woman walks past Wells Fargo bank in New York City, U.S., March 17, 2020.
Jeenah Moon | Reuters
Wells Fargo is breaking out of its lending roots. The bank has quietly gone on a hiring spree to grab a bigger slice of the profitable investment banking business long dominated by its Wall Street rivals.
French bank Societe Generale reported second quarter results for 2023.
Chesnot | Getty Images News | Getty Images
French bank Societe Generale reported a smaller-than-expected 22% slide in first-quarter net income on Friday, as profits on equity derivative sales offset more weakness at its retail bank and in fixed-income trading.
France’s third-biggest listed lender, whose CEO Slawomir Krupa is seeking to end several years of lackluster performance and trim costs, said group net income over the first three months of the year was 680 million euros ($729.30 million).
This was down 22% from a year earlier but still beat the 463 million-euro average of 15 analyst estimates compiled by the company.
Sales slipped 0.4% to 6.65 billion euros, above the 6.46 billion-euro analyst average estimate.
Helped by euro zone interest rates remaining higher for longer than expected, many European banks have beaten expectations for the first-quarter, and some have raised profit targets for the year.
French banks including SocGen have not benefited as much from the rise in rates because of the high cost of deposits in the country. Their shares have underperformed, although analysts expect the lenders to do better when rates fall.
SocGen’s investment banking division saw its earnings jump 26.4% to 690 million euros, beating forecasts, while revenues weakened 5.1% to 2.62 billion euros for the quarter.
Equity derivatives sales, an area where SocGen has historically been strong, did well, the bank said, as did corporate financing services and its advisory business.
This offset a 17% fall in sales from trading in fixed income and currencies, underperforming the average of Wall Street firms and French rival BNP Paribas. Deutsche Bank delivered a 7% rise in fixed income and currencies trading revenue.
SocGen said it continued to suffer from a costly hedging policy aimed at protecting the bank against low rates but which backfired. It cost SocGen 300 million euros in the first quarter, on top of 1.6 billion euros in 2023.
The bank no longer reports numbers for its French retail activities, more crucial to its earnings than for BNP Paribas, as a standalone business.
SocGen said the transfer from sight deposits to regulated savings account with a fixed interest rate weighed on its results.
According to a recent study by UBS, French deposits were the most expensive in Europe when rates were negative. But they increased in cost just as quickly as the European average when rates and inflation rose.
SocGen stock price evolution has trailed peers over the last three years, with shares up 9%, compared with a rise of 26% for BNP and 13.5% for Credit Agricole. The basket of STOXX Europe 600 banks has risen by 55% over the period.
Krupa, who took over just a year ago, disappointed investors last September by putting off a key profitability target by a year, amid stagnating sales, until 2026.
He has pledged to revive shares by trimming costs and delivering on targets, while selling non-core assets and investing to deploy its online bank BoursoBank and its expanded car-leasing listed group Ayvens.
Deutsche Bank shares were 6% higher on Thursday afternoon after the German lender reported a 10% rise in first-quarter profit, beating expectations amid an ongoing recovery in its investment banking unit.
Net profit attributable to shareholders was 1.275 billion euros ($1.365 billion) for the period, ahead of an aggregate analyst forecast of 1.23 billion euros for the period, according to LSEG data.
Deutsche Bank said this was its highest first-quarter profit since 2013. It also marks the bank’s 15th straight quarterly profit.
Group revenue rose 1% year-on-year to 7.8 billion euros, which the bank attributed to growth in commissions and fee income, along with strength in fixed income and currencies. The revenue print also came in ahead of an analyst forecast of 7.73 billion euros, according to LSEG.
Revenues at its investment bank increased 13% to 3 billion euros, following a 9% slump through full-year 2023 which had dragged down overall profit. The performance restores the division as Deutsche Bank’s highest-earning unit on growth in financing and credit trading revenue.
Other first-quarter highlights included:
Net inflows of 19 billion euros across the Private Bank and Asset Management divisions.
Credit loss provision was 439 million euros, down from 488 million in the fourth quarter of 2023.
Common equity tier one (CET1) capital ratio — a measure of bank solvency — was 13.4%, compared to 13.6% at the same time last year.
“There’s momentum in the businesses, actually across all four businesses, and we do think it’s sustainable,” Deutsche Bank Chief Financial Officer James von Moltke told CNBC’s Annette Weisbach on Thursday.
“We’re delivering on our commitments on costs and capital returns in the quarter.”
Germany’s biggest lender reported net profit of 1.3 billion euros in the prior quarter and of 1.16 billion euros in the first quarter last year.
In 2023, the bank announced it would cut 3,500 jobs over the coming years, as it targets 2.5 billion euros in operational efficiencies to boost profitability and increase shareholder returns.
A trader works, as a screen displays a news conference by Federal Reserve Board Chair Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange on Dec. 13, 2023.
Brendan Mcdermid | Reuters
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Stocks close lower Wall Street ended lower on Friday as investors await the Federal Reserve’s policy meeting this week for insights on rate cuts. The S&P 500 posted its second straight weekly drop, down 0.65%. The Nasdaq Composite retreated 0.96% and the 30-stock Dow lost 0.49%. In Asia, the Bank of Japan will decide at the end of it’s two-day policy meeting starting Monday if the country is ready to scrap the world’s last negative interest rate policy.
White House on TikTok The White House has called on a more divided Senate to ‘move swiftly’ on the TikTok bill that requires Chinese tech company ByteDance to sell the video app or face a ban in the U.S. Last week, the House of Representatives passed the legislation with strong bipartisan support and President Joe Biden has indicated he would sign it if approved by Congress.
Bullish on global trade The CEO of Hapag-Lloyd, one of world’s top ocean shippers, says he’s more bullish on trade for this year. He told CNBC inventories are depleted in many cases and the ocean carrier has seen a recovery after the Chinese New Year. Shares of the company recently plunged after it posted a sharp fall in net profit in 2023 and cut its dividend.
Laid-off tech workers face gloom Tech workers recently laid off are struggling with a “sense of impending doom” as jobs cuts are at the highest since the dot-com crash.CNBC spoke to number of people about how they’re navigating the challenging market. Jobs are getting tougher to find with many in the sector having to settle for pay cuts.
[PRO] U.S. election risk on China stocks Goldman Sachs has revised its barometer for the level of risk from U.S.-China tensions in Chinese stocks. It now stands at 53 out of 100, signaling a “somewhat benign” outlook for relations between the two countries. “The build-up to and the election will be consequential to asset markets globally, US-China relations, and the returns of Chinese equities,” the analysts said.
It will be a pivotal week for Wall Street as markets attention will turn to the Fed.
Signals from Fed Chair Jerome Powell and the other officials on future rate cuts will be in sharp focus as policymakers give updates on rates, economic growth, inflation and unemployment at their two-day meeting which wraps up on Wednesday.
Last week’s one-two punch of bad news on consumer and producer prices, sparked investor anxiety that inflation may have plateaued as price pressures remain sticky.
“Hotter-than-expected inflation data to start the year argue for a hawkish-leaning message from the Fed at the March FOMC meeting. That said, in a very close call, we do not yet expect this to manifest in the Fed signaling less easing this year,” said Deutsche Bank in a note.
“Our baseline remains that the first-rate cut will come in June and the Fed will deliver 100bps of reductions this year. However, risks are clearly skewed to more hawkish outcomes. The timing and pace of rate cuts could well be irregular this cycle and will likely be highly data dependent.”
Investors will also want to know whether the Fed will continue to pencil in three rate cuts for this year. Some economists argue there’s a good chance it could be pared back to only two.
JPMorgan Chase CEO Jamie Dimon recently said the central bank should move slowly on rate cuts given inflation pressures.
“You can always cut it quickly and dramatically. Their credibility is a little bit at stake here,” he said. “I would even wait past June and let it all sort it out.”
Traders work on the floor of the New York Stock Exchange during morning trading on January 31, 2024 in New York City.
Michael M. Santiago | Getty Images
The so-called “Magnificent 7” now wields greater financial might than almost every other major country in the world, according to new Deutsche Bank research.
The meteoric rise in the profits and market capitalizations of the Magnificent 7 U.S. tech behemoths â Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla â outstrip those of all listed companies in almost every G20 country, the bank said in a research note Tuesday. Of the non-U.S. G20 countries, only China and Japan (and the latter, only just) have greater profits when their listed companies are combined.
Deutsche Bank analysts highlighted that the Magnificent 7’s combined market cap alone would make it the second-largest country stock exchange in the world, double that of Japan in fourth. Microsoft and Apple, individually, have similar market caps to all combined listed companies in each of France, Saudi Arabia and the U.K, they added.
However, this level of concentration has led some analysts to voice concerns over related risks in the U.S. and global stock market.
Jim Reid, Deutsche Bank’s head of global economics and thematic research, cautioned in a follow-up note last week that the U.S. stock market is “rivalling 2000 and 1929 in terms of being its most concentrated in history.”
Deutsche analyzed the trajectories of all 36 companies that have been in the top five most valuable in the S&P 500 since the mid-1960s.
Reid noted that while big companies eventually tended to drop out of the top five as investment trends and profit outlooks evolved, 20 of the 36 that have populated that upper bracket are still in the top 50 today.
“Of the Mag 7 in the current top 5, Microsoft has been there for all but 4 months since 1997. Apple ever present since December 2009, Alphabet for all but two months since August 2012 and Amazon since January 2017. The newest entrant has been Nvidia which has been there since H1 last year,” he said.
Tesla had a run of 13 months in the top five most valuable companies in 2021/22 but is now down to 10th, with the share price having fallen by around 20% since the start of 2024. By contrast, Nvidia’s stock has continued to surge, adding almost 47% since the turn of the year.
“So, at the edges the Mag 7 have some volatility around the position of its members, and you can question their overall valuations, but the core of the group have been the largest and most successful companies in the US and with it the world for many years now,” Reid added.
Could the gains broaden out?
Despite a muted global economic outlook at the start of 2023, stock market returns on Wall Street were impressive, but heavily concentrated among the Magnificent Seven, which benefitted strongly from the AI hype and rate cut expectations.
In a research note last week, wealth manager Evelyn Partners highlighted that the Magnificent 7 returned an incredible 107% over 2023, far outpacing the broader MSCI USA index, which delivered a still healthy but relatively paltry 27% to investors.
Daniel Casali, chief investment strategist at Evelyn Partners, suggested that signs are emerging that opportunities in U.S. stocks could broaden out beyond the 7 megacaps this year for two reasons, the first of which is the resilience of the U.S. economy.
“Despite rising interest rates, company sales and earnings have been resilient. This can be attributed to businesses being more disciplined on managing their costs and households having higher levels of savings built up during the pandemic. In addition, the U.S. labour market is healthy with nearly three million jobs added during 2023,” Casali said.
The second factor is improving margins, which Casali said indicates that companies have adeptly raised prices and passed the impact of higher inflation onto customers.
“Although wages have risen, they haven’t kept pace with those price rises, leading to a decline in employment costs as a proportion of the price of goods and services,” Casali said.
“Factors, including China joining the World Trade Organisation and technological advances, have enabled an increased supply of labour and accessibility to overseas job markets. This has contributed to improving profit margins, supporting earnings growth. We see this trend continuing.”
When the market is so heavily weighted toward a small number of stocks and one particular theme â notably AI â there is a risk of missed investment opportunities, Casali said.
Many of the 493 other S&P 500 stocks have struggled over the past year, but he suggested that some could start to participate in the rally if the two aforementioned factors continue to fuel the economy.
“Given AI-led stocks’ stellar performance in 2023 and the beginning of this year, investors may feel inclined to continue to back them,” he said.
“But, if the rally starts to widen, investors could miss out on other opportunities beyond the Magnificent Seven stocks.”
Commerzbank on Thursday reported a 55% hike in net profit for 2023, as high interest rates helped the German banking giant report its best results in 15 years.
Net profit for the year beat expectations to come in at 2.2 billion euros ($2.36 billion), up from 1.4 billion euros a year earlier. For the fourth quarter, net profit was 395 million euros, down over 16% on the same quarter the year before, but ahead of consensus estimates published by Commerzbank.
Investors welcomed the results, with shares provisionally ending the session around 5.5% higher.
High interest rates were a driving factor behind the results, with net interest income up around 30% for 2023 as a whole, and 8.5% higher in the fourth quarter.
In its outlook, the bank recognized that “continuing economic slowdown will remain a challenge in the current financial year.” However, it said it expects net profit to be above 2023 levels.
The Commerzbank building (second from right) in Frankfurt am Main, western Germany, on Sept. 25, 2023.
Kirill Kudryavtsev | Afp | Getty Images
In an analyst note Thursday, Deutsche Bank’s Benjamin Goy and Marlene Eibensteiner described the numbers as a “solid set of 4Q23 results” and reiterated their buy rating on the stock.
“While the pre-provision profit was modestly below expectations, the net profit was 9% ahead of consensus. More importantly, the mix was good with net interest income and costs beating expectations by 2%,” they wrote.
“The 2024 guidance is in line with expectations, however for a bank that beat and raised its own 2023 net interest income guidance five times it remains to be seen whether the implied net interest income slow down is too conservative again in our view.”
The results follow a major business overhaul at Commerzbank, which was bailed out by the German government during the 2008-2009 financial crisis. The bank said it had reduced costs to 6.4 billion euros in 2023, down from 6.5 billion euros the previous year.
Deutsche Bank on Thursday smashed fourth-quarter earnings expectations, reporting net profit of 1.3 billion euros ($1.4 billion) and announcing a further 1.6 billion euros in shareholder returns for 2024.
Shares were 4.6% higher in morning trade in Europe.
The German lender also announced plans to hike share buybacks and dividends by 50%, returning a total of 1.6 billion euros to shareholders.
Deutsche said it is planning an additional share buyback of 675 million euros, which it aims to complete in the first half of the year. This follows 450 million euros of repurchases in 2023. It also plans to recommend 900 million euros in shareholder dividends for 2023 at its Annual General Meeting in May.
For the year as a whole, the bank reported 4.2 billion euros in net income attributable to shareholders — beating expectations of 3.685 billion euros expected by analysts.
“Pre-tax profit at 5.7 billion is at a high, we grew year-on-year despite some items that in this year created some noise, but what’s really exciting is the momentum we see in the business,” Deutsche Bank CFO James von Moltke told CNBC on Thursday.
“We had a 10% year-on-year growth in our investment bank in the fourth quarter, and admittedly in a year that was still retracing the very strong performances of 2021 and 22, so 9% down for the full year, but we see momentum especially now going into ’24 in origination advisory and very strong, I think consistent, performance in our FIC [fixed income and currencies] franchise.”
As part of a 2.5 billion euro operational efficiency program, Deutsche Bank said it expects to cut 3,500 jobs, mainly in “non-client-facing areas.”
Deutsche Bank shares
As of the end of 2023, savings either realized or expected from completed measures under the efficiency program grew to 1.3 billion euros, the bank estimated. The program’s goal is to reduce the quarterly run-rate of adjusted costs to 5 billion euros, with total costs falling to around 20 billion in 2025.
In a statement Thursday, Sewing said the bank’s 2023 performance “underlines the strength of our Global Hausbank strategy as we help our clients navigate an uncertain environment.”
“We have achieved our highest profit before tax in 16 years, delivered growth well ahead of target and maintained our focus on cost discipline while investing in key areas,” Sewing said.
“Our strong capital generation enables us to accelerate distributions to shareholders. This gives us firm confidence that we will deliver on our 2025 targets.”
Other fourth-quarter highlights included:
Net revenues grew 5% year-on-year to 6.7 billion euros, bringing the annual total to 28.9 billion.
Net inflows of 18 billion euros across the Private Bank and Asset Management divisions.
Credit loss provision was 488 million euros, compared to 351 million in the same period of 2022.
Common equity tier one (CET1) capital ratio — a measure of bank solvency — was 13.7% at the end of 2023, compared to 13.4% at the end of the previous year.
Amid concerns about bank profitability and reports that the German government is considering a sale of some of its company holdings, including its 15% stake in Commerzbank, Deutsche has emerged as the subject of merger speculation in recent months.
However, CEO Christian Sewing told CNBC at the World Economic Forum in Davos, Switzerland that acquisitions were not a “priority” for Germany’s largest bank.
Correction: This article has been updated to reflect that Deutsche Bank’s results were released on Thursday.
The headquarters of German banks Deutsche Bank (L) and Commerzbank in Frankfurt, Germany.
FRANK RUMPENHORST | DPA | Getty Images
Banks should be setting aside recent bumper profits to provision for clients defaulting on loans as the impact of higher interest rates feeds into the economy, according to the president of the country’s regulator.
The banking industry enjoyed a windfall in 2023 as lenders reaped the benefits of central banks’ interest rate hikes while keeping deposit rates low.
Central banks around the world tightened monetary policy aggressively over the last two years in a bid to tame soaring inflation, but focus has now turned to when the likes of the U.S. Federal Reserve, the European Central Bank and the Bank of England will start cutting policy rates again.
Though economies have been surprisingly resilient in the face of rising borrowing rates, many policymakers have warned that the impact on households and businesses has yet to be fully felt.
The head of the German regulator (the Federal Financial Supervisory Authority which is better known as BaFin) told CNBC Tuesday that while the shock from rate increases has been “digested in the banking books,” there could be further troubles ahead.
“The difficulties that come from this rate environment for the clients of the banking sector — whether that’s in the real estate sector or in the real economy — we haven’t seen that flow through yet,” he told CNBC’s Annette Weisbach, adding that it “won’t be easy” to repeat the profitability expected in 2023 and 2024 as rates remain historically high.
“So firms have to be very wary about provisioning requirements about not only letting the shareholders profit from this good year that they’ve had, but put as much aside to deal with the costs that are coming because they will come.”
However, many banks have yet to meaningfully increase their loan loss provisions. Branson said the market should expect them to start this year, and some may have already begun setting aside more money for bad loans in the final quarter of 2023.
“We’ve seen things happen in the commercial real estate market, which we’ve maybe predicted for a long time but now are crystallizing, so as I said 2024 and the years thereafter, they’re not going to be as easy as 2023,” Branson said.
He added that lenders should “keep the powder dry for the more difficult times,” including investing in operational security and stability, such as protection against cyberattacks.
Company insolvencies have yet to meaningfully pick up in the way that would be expected during a rapid incline in interest rates. However, Branson noted that the figures have thus far been “artificially low” due to a prolonged prior period of extremely low interest rates and the massive fiscal stimulus from governments to tackle the Covid-19 pandemic and energy crisis in recent years.
“So I think it’s almost pre-programmed that insolvencies will begin to rise again and that’s in a way normal for banks that they’ll also have have to deal with some credit losses in their books,” he said.
“That’s why we’re a bit skeptical the profitability will continue to rise after such a good 2023, and that’s why the banks have to look carefully now about what they need to provision.”
Christian Sewing, Chief Executive Officer of Deutsche Bank, has acknowledged that a recession in Germany is inevitable, and urged leaders to accelerate its decoupling from China.
Denis Balibouse | Reuters
Deutsche Bank CEO Christian Sewing on Thursday said that merger and acquisition activity is not a priority for his group, as speculation resurfaces over the future of domestic rival Commerzbank.
The two German lenders abandoned a merger plan in 2019, but concerns about bank profitability, and reports that the German government’s is considering selling some of its company stakes, have rekindled whispers about a possible tie-up in recent weeks.
The state still has a 15% stake in Commerzbank, but Reuters reported earlier this week that Finance Minister Christian Lindner is open to disposing of it.
The merger of Germany’s two biggest banks would create a combined entity with around $2 trillion in assets, although Deutsche Bank’s low valuation could complicate any such move. The bank trades at around 12 euros per share, a fraction of its book value, and a significant portion of assets would need to be marked down.
Speaking to CNBC on the sidelines of the World Economic Forum in Davos, Switzerland on Thursday, Sewing appeared to pour cold water on the rumors, at least for now.
“I wouldn’t say it’s on top of my priority, to be honest. I have always said for years that M&A in the banking industry, particularly in Europe, must come at some time, but most important for that is that certain preconditions are met — preconditions from a regulatory point of view, finalization of the banking union,” Sewing said.
“Obviously, with regard to the sharply increased interest rates, you have to think about fair value gaps given the mortgage books of a lot of banks, so I don’t think it is a priority for this year.”
The European Banking Union was created in 2014 and seeks to ensure the bloc’s banking and financial systems are stable.
This left the bloc unable to implement a portion of its banking union legislation described by Eurogroup President Paschal Donohoe as “a key element of our common safety net.”
“Therefore, we are focusing on our own business,” Sewing concluded. “If, in this own business, there are possibilities and options for doing the one or the other smaller add-ons, like we have done with Numis, then obviously we are looking at it.”
