Deutsche Bank is dealing a swift blow of reality to the newfound financial services party. After mostly beating second quarter earnings expectations by wide margins, in some cases reporting windfall trading profits, the financial press has been quick to reopen discussions of whether we are in a long-lasting recovery.
As I pointed out last week, the catch to that is mostly that the big, one-off trading gains are disguising pressure at the operating-level on bread-and-butter banking activities such as Mergers & Acquisitions, lending, custody and other core departments that should report fairly consistently, no matter whether the times are good or bad.
Deutsche Bank's latest earnings announcement displays a shining example of how this process is still hampering any kind of material growth in the banking sector.
While Deutsche reported a jump in net income to 1.09 billion euros in the April to June period, led by higher revenue in -- you guessed it -- trading stocks and bonds, that was only just enough to offset the firm's increased amount of 1 billion euros that it set aside for bad loans.
"Deutsche Bank had to significantly increase loan-loss provisions because of the worsening economy, and it won't get better anytime soon," Lutz Roehmeyer, a fund manager for $15.5 billion Landesbank Berlin Investment in Berlin and a Deutsche Bank shareholder, told Bloomberg today.
Most worryingly of all, Deutsche's asset and wealth management business reported a staggering 85 million euro loss, while earnings at its global consumer banking division dropped 83 percent from a year ago, to 55 million euros. In a climate where there's a genuine increase in inter-bank activity and consumer confidence, these two areas are the ones you would ordinarily expect to see faring well.
Deutsche Bank's lousy second quarter performance should come as a significant sign to financial chief executives that times will remain tough for a little longer than they thought previously. The bank is one of the few not to have experienced an exodus of top management, and it has consistently shown itself as one of the few firms which has yet to use dubious accounting methodologies in order to formulate profits out of nowhere.