Deutsche Bank Maintains Optimism Despite Profit Decline

Germany's largest financial institution, Deutsche Bank, has reported a significant drop in earnings for the year 2024, falling short of expectations. This downturn is largely attributed to a costly legacy issue. However, the bank's management is already working on new objectives for the upcoming years.

With an aim to rebound from the recent decline in profits, Deutsche Bank is determined to achieve over 10% return on equity this year. The CEO has expressed confidence, citing a robust January performance as a positive indicator for future growth. In the previous year, the return on equity was only 4.7%, less than half of the target.

To become the leading bank in Europe, the management team is developing a strategic plan referred to as 'Deutsche Bank 3.0,' set to roll out in 2026. This initiative will focus on streamlining operations and enhancing the use of artificial intelligence to cut costs.

There will also be a careful assessment of resource allocation to ensure that investments are made in sectors that yield above-average returns. The CEO hinted that the bank may even consider exiting certain areas of business if necessary. Detailed plans are expected to be shared later this year. Notably, in 2019, Deutsche Bank had already divested its equities trading and hedge fund operations.

One significant factor contributing to the profit decline was the compensation payments to former shareholders of Postbank. Additionally, the bank faced challenges stemming from foreign currency loans in Poland, where many institutions are required to compensate customers following court rulings on previously issued contracts. Deutsche Bank set aside approximately 300 million euros to address these claims.

The Postbank legal matter resulted in a hefty compensation cost of 900 million euros. Former shareholders argued that the bank had undervalued their shares prior to its majority acquisition of Postbank in 2010. The Cologne Higher Regional Court ruled in favor of the former shareholders.

Overall, Deutsche Bank incurred legal costs totaling approximately 1.7 billion euros last year. In the final quarter of the year, the profit attributable to shareholders plummeted by 92% to just 106 million euros due to these legal expenses.

Despite the profit decline, the bank plans to increase dividends from 45 cents to 68 cents per share, and it is also looking to return 750 million euros to shareholders through a stock buyback program.

Aside from these exceptional charges, Deutsche Bank's overall performance in 2024 was satisfactory. The bank set aside over 1.8 billion euros for potential loan defaults, which is about 300 million more than the previous year. However, total revenues increased by 1.2 billion euros to nearly 30.1 billion euros, offsetting the higher provisions for risky loans. The CEO is optimistic that revenues will rise further to approximately 32 billion euros in 2025.

The confidence in achieving the 10% return on equity is bolstered by expectations of reduced restructuring and legal costs, with the bank's balance sheet now in a healthier state. The management anticipates non-operational costs will decrease by 2 billion euros this year. The CEO believes that the peak of loan loss provisions was reached in 2024.

However, the bank has adjusted its cost-reduction goals. While it previously aimed for costs to consume less than 62.5% of revenues by 2025, the new target is now set at below 65%. Last year, the cost-to-income ratio worsened due to extraordinary expenses, rising from 75 to 76 cents, meaning the bank had to spend 76 cents to generate one euro in revenue.