(This story was rewritten on December 16 to correct the currency unit to cents in paragraph 33)

Written by Tom Sims and Marta Oroz

FRANKFURT (Reuters) – In 2019 Deutsche Bank (ETR:) Embark on a journey to reduce reliance on the volatile investment bank and instead rely on a more stable business serving corporate and retail clients as a means of restoring profitability.

It didn’t turn out that way.

Germany’s largest bank has returned to earnings and is well on its way to meeting some key targets that were pledged to shareholders, but that’s thanks to the investment bank.

Deutsche’s bottom line benefited from a sudden rise in securities trading and dealmaking – business the bank was trying to lean less on after years of scandals and fines.

A prolonged period of low interest rates and the pandemic have complicated Deutsche’s plan to make more money from its bread-and-butter business of lending to businesses and individuals.

But the tide, buoyed by rising interest rates, is turning.

Higher interest rates boost profits from regular banking, while there has been a decline in mergers and acquisitions.

The bank said it was beginning to see a rebalancing away from the investment bank into its other businesses.

“We don’t expect most of the bank’s growth between now and 2025 to come from investment banking,” board member Fabrizio Campelli said in an interview. He previously managed the overhaul of Deutsche and now oversees the corporate division and investment bank.

The bet in 2019 was for the investment bank to generate 30% of revenues in the main divisions of Deutsche, as the company exited stock trading, focusing more on corporate and retail banking.

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But when the pandemic hit in 2020, it created volatile markets that favored the bank’s bond trade, as it is one of the largest players in the world. This made the investment bank the group’s biggest profit driver. In 2021, the wave of global deal-making has given it another boost.

In those two years, the investment bank generated nearly 40% of the revenue and more than 75% of the pre-tax profit.

Meanwhile, the bank’s corporate and retail business stagnated as ultra-low interest rates persisted for longer than expected.

“It would have been better if the stable regions had grown more than the investment bank,” said Andreas Tomay, portfolio manager at Deka, a senior investor at Deutsche.

“Overall, however, the Bank is on its way to making good money on a sustainable basis. Now the stable regions will have to play a bigger role again in the future,” he said.

The deal-making meltdown this year and moves by central banks to raise interest rates to fight inflation helped other divisions at Deutsche.

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UBS said in a report this week that Deutsche’s business outside of the investment bank is showing “good momentum,” and noted “upside potential” for the shares, which are down nearly 10% this year.

Streets of Derry

Deutsche, which ranks as one of the world’s most systemically important banks, embarked on a four-year, €9 billion ($9.59 billion) turnaround plan in 2019 after years of losses.

Chief Executive Christian Swing recalled the scale of Deutsche’s crisis at a conference last month in Berlin. “When I took over in 2018, we knew we were in dire straits,” he said. “We knew things had to change.”

Deutsche has met or exceeded some targets in its transformation plan, with a deadline for completion approaching the end of 2022.

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Deutsche, which has lost around six billion euros over the past decade, has had nine consecutive quarters of profits.

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Regulators say the bank is in a stronger position than it was in 2016, when it became public that Deutsche would have to pay a multibillion-dollar fine for its role in the US mortgage crisis.

Deutsche bankers are relieved that the one-off bank is mostly out of the headlines. And they privately say they feel the pain of its Swiss rival Credit Suisse, which is facing its own crisis after losses and scandals.

Olivier Panis, an analyst at Moody’s (NYSE), said that restructuring banks takes time.

He said that Deutsche’s management “made the right decisions, perhaps at the right time, also taking advantage of favorable market conditions.”

Rating agencies, including Moody’s, are upgrading Deutsche’s ratings in a sign of confidence that earnings are sustainable.

organizers and costs

Organizational issues have not completely disappeared. A person familiar with the matter said Deutsche Bank is under scrutiny for its controls to prevent money laundering.

In November, Germany’s banking watchdog BaFin said it had told Deutsche it would face fines if it did not comply with specific measures to improve collateral.

Deutsche said at the time it had and would continue to invest the resources and management attention necessary to improve its controls and meet regulatory expectations.

Deutsche’s asset management division, DWS, is under investigation by US and German authorities for alleged “greenwashing,” allegations DWS has denied.

The bank said it would defend itself “vigorously” against allegations that it may have missold products of a risky investment bank to clients in Spain and elsewhere, something the bank has investigated internally.

Deutsche Bank has also come under pressure from regulators to rein in its leveraged financing business, where credit is extended to already heavily indebted borrowers.

Looking ahead, Deutsche has set new targets for 2025, including a cost-to-income ratio of less than 62.5%, which means spending 62.5 cents for every euro earned.

With inflation soaring and regulatory costs soaring, analysts believe Deutsche will not meet the target. They expect 69% in 2025, down from 73% this year.

Deutsche executives said they see room for more cost savings.

For competitors JPMorgan (NYSE:) and Goldman Sachs (NYSE: ), analysts expect the cost-to-income ratio to be around 62% this year, based on Refinitiv data.

“Execution risks remain high … on the bank’s 2025 cost-cutting plan,” said Fitch analyst Marco Diamantini, citing rising inflation and a strong dollar.

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The next phase of Deutsche’s plan comes as inflation and high energy prices take a toll on the German economy, raising questions about how corporate and retail businesses will fare if loans go bad.

($1 = 0.9382 euros)