As the working week drew to a close in Frankfurt, Deutsche Bank AG’s Christian Sewing was on a roll. Upbeat first-quarter earnings had sent the lender’s shares to the highest level since 2017, bolstering a perception that the firm had finally shaken off its scandal-prone past.
The good vibes didn’t last long. A day after investors had been told to expect higher payouts on Thursday, Deutsche Bank made the announcement that it’s putting aside as much as €1.3 billion ($1.4 billion) in legal provisions. That was the result of a surprise court hearing which could favor former shareholders of Postbank AG, a competitor it took over 14 years ago.
The German lender’s shares plunged as much as 5.5% on Monday as analysts warned that the lender may be forced to walk back its Thursday promise. Morgan Stanley said the bank could delay a second buyback this year; KBW analysts said it could be scrapped altogether.
The latest development is a stinging setback for a CEO who’s widely credited with pulling Deutsche Bank out of a deep crisis when he took over in 2018. Before Monday’s open, shares had been up by about a third this year, making the lender one of the best performers among major European banks, as executives look to return money to investors after a decade of almost no dividends.
But the Postbank provisions now cast doubt over Sewing’s ability to carry out a second buyback this year. Stepping up investor payouts is a key element of his attempt to lift the lender’s share price.
In a release on Sunday, Deutsche Bank sought to explain why it hadn’t provided more clarity on the Postbank case during the Thursday earnings call, saying that it was caught completely off guard by the turn of events on Friday.
The Higher Regional Court of Cologne indicated that it may partially side with claimants in a lawsuit against Frankfurt-based Deutsche Bank filed by shareholders of Postbank. Claimants say Deutsche Bank should have paid more than it did.
The lender had “no indication” that the Postbank court hearing “would impact the likelihood of a future outflow in the manner it eventually did,” a document posted by the bank on its website late on Sunday said. “It was management’s expectation that the Court would opine” differently.
It is “too early” to decide if Deutsche Bank can still make good on its buyback promise for this year, it said in the document. However, the firm “remains on track” for its target to pay out more than €8 billion to shareholders in the years through 2026.
It also reconfirmed its 2025 financial targets as well as its 2024 guidance for revenue and adjusted costs.
While the Postbank issue is “manageable” for Deutsche Bank, it might “limit potential for upside to buybacks near term,” Bloomberg Intelligence analysts said in a note.
The 2Q provision implies a 20-bp pro forma cut to its 1Q CET1 ratio to 13.25%. Management doesn’t expect a significant impact on strategic plans or financial targets, though the provision highlights ongoing legal risks and costs.
Alison Williams, BI analyst
It’s the second big Postbank hit for Sewing in less than 12 months. Last summer, Deutsche Bank announced a breakthrough in its years-long effort to wind down its former competitor’s IT operations as a way to trim costs, only to admit a few weeks later that the move had cut off thousands of retail clients from vital banking services. Sewing was forced to make a public apology as regulators and politicians blasted the bank over the botched project.
The irony that Postbank is at the heart of his biggest current challenge won’t be lost on Sewing. The Deutsche Bank lifer served as head of the vast retail division, including the former competitor, before becoming CEO.
At the time, Deutsche Bank - under then-CEO John Cryan - aborted an effort to sell Postbank, putting Sewing in charge of a massive re-integration that included cutting one of the two IT systems. The project ended up lasting long into Sewing’s CEO tenure while causing massive problems with clients.
Shareholders will be able to have their say on the latest setback at the bank’s annual general meeting on May 16. Before Friday, Sewing had been poised to talk up the lender’s bright future. He now may find himself focusing on its bumbling past.
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