The recent outstanding performance of the investment banking division of Deutsche Bank is partly due to a previously unknown accounting maneuver, joint research by “Süddeutscher Zeitung” and “FinanzSzene.de” show. Specifically, since the beginning of 2020, the institute has no longer booked around half of the expenses for the bank levy in investment banking, but in the “bad bank” called the “Capital Release Unit”. This involves a total of 300 million euros.
With a little bit of analytical effort, the piquant balance sheet volte can be extracted from the “earnings reports” for the individual divisions and, indirectly, from the CFO presentations on the Q figures.
The bank also does not provide a breakdown of which part of the bank levy was and is booked where. According to the bank, however, there are clear balance sheet rules for the allocation of the bank levy, which are followed and which leave no design options.
The research results put Deutsche Bank’s successes in investment banking (which we have recently regularly praised) into perspective at least to a certain extent. To classify: It is well known that the largest local financial institution could have made a profit again in 2020 despite the Corona crisis for the first time since 2014 (the 2018 profit would not have been made in the new segment structure).
Analysts recently assumed a positive after-tax result of EUR 109 million – compared with a loss of EUR 5.7 billion in the previous year. This profit is also expected across the bank after all costs, taxes and also the bank levy. In the meantime:
The investment banking sector is likely to be by far the main responsible for profit. And it doesn’t just shine internally because there is “a lot going on” in the markets.
How Deutsche Bank actually fiddled with its balance sheets (I)
Let us now come to the actual analysis (for which we have to go back a little, please look it up):
- Basically, the performance of Deutsche Bank depended more or less on two components, firstly on the investment bank, which is now highly profitable again (equity return 9M 2020: 10.6%) and secondly on the naturally high deficit “bad bank” (equity return 9M 2020: minus 28.6%)
- In Deutsche Bank’s communication, however, it is usually about the “core bank”, that is to say about the entire bank without the bad bank. You should measure us against thisis always the message to analysts, investors and the public
- Even if Deutsche Bank made progress in terms of earnings in the past year, the improvement in earnings is primarily due to lower costs – for which there is also a lot of praise from the analysts
- Specifically: The costs have recently decreased eleven quarters in a row.
The communication here is usually about the “costs adjusted for transformation costs and bank levy”
- Where and how exactly the bank records and adjusts the bank levy – unlike costs for restructuring, transformation, litigation or write-offs – is not shown in the extensive financial data annex, which is published quarterly …
- … but: Insights into the booking of the bank levy can only be found from time to time in the formulations in the quarterly report and in the quarterly explanations of the financial director James von Moltke on the division results
- Now you still have to know:
The bank levy that banks and savings banks have to pay annually since 2011 is based on the volume and risk of the business – this includes, for example, deposits or the portfolio of derivatives, and they are collected using data from two years ago – for example institutes pay for 2018 at the beginning of 2020.
The vast majority of bank information is posted at Deutsche Bank – as is the case with other institutions – always in the first quarter
How Deutsche Bank was fiddling with its balance sheets (II)
To understand what Deutsche Bank suddenly did differently in 2020, you first have to look at the reference year 2019 …
- In 2019, Deutsche Bank set aside a total of EUR 604 million for the bank levy in Q1
- Neither in the 31-page financial annex to the Q-numbers (see here) nor in the 33-page detailed quarterly report (see here) did the institute go into more detail about the bank levy in terms of where what levies of this “chunk” of 0, 6 billion euros are booked …
- … however, CFO von Moltke provided a detail in his presentation on the Q1 / 2019 figures (on page 12): Of the total investment banking costs of EUR 3,393 million (adjusted: EUR 3,367 million), EUR 535 million are account for the bank levy.
- In other words: At that time, investment banking had to pay 88% (i.e. EUR 535 million of EUR 604 million) of Deutsche Bank’s bank levy. Which (also) contributed to the fact that investment banking closed the quarter with a pre-tax loss of almost 90 million euros.
- Fast forward one year to Q1 2020. Deutsche Bank is meanwhile (as we know, the new strategy was announced in July 2019 …) in the process of transformation, has changed the layout of the divisions and founded the said “Bad Bank” …
- … and what about the investment bank, which was still loss-making a year earlier from a quarterly perspective? From January to March she suddenly earned EUR 622 million before taxes. It was precisely this “turnaround” that has shaped the general narrative about Deutsche Bank since then: Sure, Corona is out there – but thanks to its comeback in investment banking, the most important financial institution in the republic has so far been able to evade the negative pull in an impressive way …
- If you now compare the Moltke Q12020-Presentation with the Moltke-Q1-2019-Presentation, the boxes for cost development are the same (page 21) largely that of the previous year. Except for one detail: The note on the amount of the bank levy is missing this time (oops!).
- Now, to be fair, I have to say that the detailed quarterly report now contains more information than was the case a year before:
The bank levy in Q1 2020 now amounts to 503 million euros. In Q2, by the way, 124 million euros will be added, so that in 2020 it will be 627 million euros.
- Of the 503 million euros in the first quarter, however, according to the detailed quarterly report (which we and other observers had overlooked at the time), the investment bank suddenly accounted for only 124 million euros. In contrast, where was 247 million euros now posted? Exactly, in the Bad Bank. In Q2, this bad bank added another 54 million euros, which results in the above-mentioned 300 million euros (to be exact: 301 million euros) for the bank bank.
- In the investment banking division, on the other hand, they have been pedaling for 388 million euros since 2020 lesser Cost of the bank levy than in the previous year
- At that time there were no more detailed breakdowns of how the bank levy affects other sectors.
This is how it looks in direct comparison:
|in millions of euros||2019||2020||change|
|Total bank levy||604||627||+ 23|
|of which investment banking||535||147||– 388|
|of which “Bad Bank”||0||301||+ 301|
|not defined by it||69||179||+ 110|
As of September 30, 2020, source: quarterly reports, presentations, own calculations
What Deutsche Bank itself says about its maneuver
Now one thing is important: that assets and business are transferred to internal “bad banks” was a common practice in banks after the financial crisis, and that such maneuvers serve the goal of making the advantages of the profitable areas more visible. And:
The re is no room for maneuver.
In a statement by the institute: “Within Deutsche Bank AG, the distribution of the bank levy, as well as the distribution of the other income and expense items to the segments, is transparent and objective. When allocating the bank levy to the segments, we map the methodology of the Single Resolution Board as far as possible. This also corresponds to the IFRS accounting standard. Our approach to evaluating the segment result is detailed in our 2019 annual financial statements, page 267 (English version), Note 4. This approach applies equally to all segments including the CRU. ”
However, whether the attributes “transparent” and “objective” are really appropriate – that could be debated. After all, the consequences of this balancing maneuver are hidden in the depths of their presentations. To date, the institute does not provide a breakdown of how the total of more than EUR 500 million bank levy is distributed exactly across the divisions.
Whatever one might ultimately think of the EUR 300 million move: In any case, it underscores the paramount importance of the “bad bank” for the profitability of investment banking (and thus the overall result).
In order to understand the extent, you have to keep the following calculations in mind: With the restructuring of the group from July 2019, in the course of which the areas were also newly tailored (establishment of the “Bad Bank”, change of the transaction bank from the investment bank to the ” Corporate Bank “), Deutsche Bank has also prepared retrospective” pro forma “results, as the group results would have been in the new structure in 2018. On this basis – as of today – the following picture emerges at Pre-tax profit since the beginning of 2018 (Highlighting us):
|in millions of euros||2018||2019||9M 2020||total|
|Corporate & Other||-461||-247||-597||-1.305|
|Bad Bank (CRU)||-1.404||-3.170||-1.784||-6.358|
Source: Deutsche Bank
… from which follows: In the first nine months of the last year, the investment bank generated 98% of the pre-tax profit of the “core bank” – but also at the price that the “bad bank” (including bank levy !!!) has been in since the beginning of 2018 and September 2020 piled up around 6.4 billion euros in losses before taxes and, according to analyst estimates, further losses will be added in 2021 and 2022.
The “Capital Release Unit”, however? Is the filthy kid that is rarely shown in public.
If you compare the transcript of the Investor Day in December 2019 with the one from December 2020, the number of mentions from investment banking, private banking and asset management increased significantly. In contrast, the word “Capital Release Unit” only appeared 9 times instead of 42 times in 2019; a separate presentation on the division (in which 36% of the operational risk-weighted assets were still missing) – unlike in 2019 – was even completely missing.