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Deutsche Bank heading for more stability by Reuters

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© Reuters. Reuters: Deutsche Bank building in Frankfurt, Germany on February 2, 2018. REUTERS/Ralf Orlowski.

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(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.

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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.

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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.

Deutsche Bank participates https://www.reuters.com/graphics/DEUTSCHEBANK-STRATEGY/jnpwyearwpw/chart.png

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.

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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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Investment Bank Returns https://www.reuters.com/graphics/DEUTSCHEBANK-STRATEGY/myvmonabevr/chart.png

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.”

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

Report Card https://www.reuters.com/graphics/DEUTSCHEBANK-STRATEGY/movanqdxva/chart.png

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

Deutsche Bank results https://www.reuters.com/graphics/DEUTSCHEBANK-STRATEGY/egpbykolbvq/chart.png

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.

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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

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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.

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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.

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

Deutsche Bank costs https://www.reuters.com/graphics/DEUTSCHEBANK-STRATEGY/dwvkdrzzbpm/chart.png

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)

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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Economic

Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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Economic

German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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