Deutsche Bank's earnings call was the most brutally honest, angsty thing we've heard in a long time

Deutsche Bank just reported third quarter earnings, and the earnings calls with analysts to discuss the numbers is really worth a listen.

After the German lender reporter earnings that beat forecasts, CEO John Cryan got on the call and spoke about “infuriating” news stories about the bank, and the fact that clients don’t call as much when the bank is in the headlines.

Cryan started out by setting out how the bank’s third quarter had been impacted by reports of a potential $14 billion fine in the US. He said (emphasis added):

“The quarter was clearly overshadowed by the attention paid to our negotiations concerning the US. Department of Justice’s initial settlement proposal relating to RMBS matters. This has created uncertainty, uncertainty that affects the market’s view of Deutsche Bank as an investment, uncertainty that affected some clients’ views of Deutsche Bank as a counterparty, and uncertainty that even affects our financial planning and strategy execution.”

He added that this had an impact on the bank’s financial planning (emphasis added):

“We’re acutely aware of this changing contours of the operating environment and we are responding. As I said in the last quarterly call, we need to restructure and modernise the bank faster and with higher intensity. We’re taking steps now particularly to achieve additional cost savings and RWA reductions. But we’re also addressing a more challenging outlook in our planning to ensure we achieve our financial goals.”

Then the question and answer session with analysts started. Jernej Omahen, an analyst at Goldman Sachs asked about liquidity. Marcus Schenck, chief financial officer at Deutsche Bank, said that the speculation about the bank had taken a toll. He said:

“With regard to our liquidity reserves, clearly the last two weeks in September, post the unfortunate leak of an initial ask from the Department of Justice, has caused a lot of speculation around the bank, and that certainly took, to some extent, its toll. That probably continued for another one week in October. And since then, the situation has stabilised. Our liquidity reserves as of today are largely where they were at the end of September.”

He added that this had an impact on the prime brokerage business, the unit that deals with hedge funds. Bloomberg reported in September that some hedge funds clients were moving business from the bank. Schenck said:

“Our prime brokerage business certainly has suffered and we showed that in the numbers. But the development with regards to that business quasi has followed what we have seen with regard to liquidity development, namely, there was probably another week of speculation into October, and since then the situation … the liquidity reserve has stabilised.”

Screen Shot 2016 10 27 at 10.42.08 AMMarketsInsiderDeutsche Bank’s US shares.

Kian Abouhossein at JPMorgan then asked Cryan if he had spoken with clients to put their mind at ease over Deutsche Bank’s position.
Cryan said:

“To dispel any myths, I don’t just sit poring over spreadsheets, which some people just [think is] my personality. I’d like to spend — I got a personal rule that I have to spend at least an hour a day with clients. And I do spend an awful lot of time with people who are sometimes counterparts, competitors, vendors, also to stakeholders in the bank.”

He added that when the bank’s name was in the headlines, the bank saw less business in sales and trading. He said (emphasis added):

“We do see a diminution in revenues across many of our businesses. As Marcus said, a lot of that driven by negative interest rates but not just. We don’t know how much new business was impacted. We can take stabs with it. But we know that when our name is in the headlines for the wrong reasons, the phone doesn’t ring as frequently. We don’t know how frequently it would have rung had the name not been in the headlines. So, expect some revenue attrition, but we work hard on it, and it’s a credit to our people and their tenacity that they have gone out there and raise revenues on the quarter-on-quarter basis.”

There was then a testy exchange between Stuart Graham, the founder of Autonomous Research who has been critical of Deutsche Bank in the past, and Cryan. Graham asked what lessons Cryan had learnt from seeing the share price crash twice in eight months. The exchange was something to behold:

“Graham: What lesson do you see or draw from that? It seems to me like the markets lost faith in your strategy and requires a fundamental change, but maybe you see it differently. Thanks.

Cryan: I do see it differently, and I don’t try to manage the share price ever. I try to manage the bank.

Graham: OK. So, in the outlook statement, in the interim report, it sounds like you’re still committed to the 10% ROE in 2018 and then the 17% cost income ratio. Firstly, is that right and given consensus is a long way away from that, what have we all got wrong that you see that we don’t see?

Cryan: This is still the target and we always said we need to be able to execute and demonstrate we can get there rather than just talk. So, what we’ve tried to do is deliver. And on the first year plan we set ourselves, we’re pretty comfortable that we’ve been delivering most of what we said we’d do. Environment has been harder, but we’ve picked up, as I said, the pace and intensity of what we’re doing. And it’s not for lack of hard work or commitment from our people. So, we’re trying as best as we can to meet the targets.

Graham: With all these stories about reintegrating Postbank and all that, sounds like you think the plan is fine, there’s no dramatic changes needed. It’s just about executing on what you’ve talked about.

Cryan: That’s correct.”

Andrew Coombs at Citigroup then asked if the bank might changed its bonus structure, following a Bloomberg story that said such a move was being considered.

Schenck, the CFO, said that while a decision hadn’t been taken yet, “given the situation of the bank and the profitability situation of the bank, in particular thinking about the senior population of the bank, having more tied towards the share price development in the future seems to make sense to us.”

Then, towards the end of the call, Jacques-Henri Gaulard of Kepler Cheuvreux asked about an “insane amount of communication” and leaks that appeared to come from inside of Deutsche Bank. Cryan responded:

“Yes, it’s infuriating. There’s all sorts of speculation and it really is non-sensical, some of it. On the same day, we can have people buying shares in our company and selling shares. And I don’t know if it comes from internally or externally. We just don’t know where some of these speculation, where these leaks come from. We have looked but we never find. But unfortunately, the only way to combat this is actually to deliver what we said we’re going to deliver and improve the bank and where possible, meet our targets. And hopefully, people get immune to the fact that there’s all sorts of nonsense spoken about the bank from time to time, and they listen to the official communications and not to speculation.”

The analysts seemed to appreciate the honesty. Kian Abouhossein, an analyst at JPMorgan, said in a note after the call that the open communication was welcome, even if it remains difficult to figure out where Deutsche Bank is heading.

“Overall, management honesty is welcome, admitting that ‘phones have been ringing less’ considering recent news flow and subsequent counterparty concerns by clients — so it is difficult to conclude on revenue loss impact and hence the impact on earnings,” he said.

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