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Deutsche Bank's slump deepens as trading hit hurts revenue

Shares of Germany's largest lender slide on reports of possible government-brokered merger with Commerzbank AG

Frankfurt

DEUTSCHE Bank AG shrank for an eighth straight quarter in the final months of 2018, leading chief executive officer Christian Sewing to pledge yet more cost cuts as he seeks to persuade investors his turnaround plan can produce sustainable profits.

In a period that was overshadowed by market gyrations and images of police raiding the bank's headquarters in November, revenue fell 2.4 per cent, led by a slump in the key fixed-income trading business that did worse than peers.

Mr Sewing said the bank would return to "controlled" growth, a promise that eluded his predecessor, and said if revenue keeps disappointing, he'll find more savings.

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"Management has delivered on what is in their control in the medium term: cost, capital and liability optimisation," JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan wrote in a note. "However, for now, we remain concerned about Deutsche Bank's inability to turn around" fixed-income trading.

The prolonged revenue contraction is adding pressure on the CEO and chairman Paul Achleitner to explore alternative fixes for Germany's largest lender. Mr Sewing, who only took over last year, has pleaded for patience with his strategy of expense controls and a scaled-back investment bank, but government is worried he may not succeed before the next economic slowdown.

Top executives believe they may not be able to avoid a radical solution such as a government-brokered merger with Commerzbank AG unless they can show improvement this quarter, people familiar with their thinking have told Bloomberg.

Deutsche Bank fell 2.1 per cent in Frankfurt trading. That extended a 4 per cent decline on Thursday after Bloomberg reported that a deal with Commerzbank may happen as early as mid-year. The stock lost more than half of its value last year.

Mr Sewing delivered on a pledge to post the first annual profit in four years, with Deutsche Bank reporting net income after minority interests of 267 million euros for 2018, despite a bigger-than-expected loss in the final three months. The bank also achieved a target of keeping costs, adjusted for one-time items, to below 23 billion euros.

He stepped up his target for adjusted costs, promising to keep them below 21.8 billion euros (S$33.7 billion) this year, compared with the 22 billion euros previously announced, and affirmed a plan to return at least 4 percent on tangible equity "despite a challenging market environment".

But the key securities unit kept losing market share, particularly in fixed income trading, where revenue slumped 23 per cent, and also in equities, which declined 0.8 per cent. The lender's US peers on average reported a 17 per cent drop in fixed-income trading and 4 per cent higher equities revenue, according to Bloomberg Intelligence.

James von Moltke, Deutsche Bank's chief financial officer, said that the raid "absolutely impacted" business in December. A group of about 170 law-enforcement officials searched the bank's headquarters and other offices in late November, in a case tied to the Panama Papers, fuelling market concern about potential legal fines.

Mr Sewing said at the time that the bank had considered the case closed, having examined it in 2016, when news about the Panama Papers first broke.

Germany's largest bank has been facing declining revenue for four years. While a deal is viewed by some as an imperfect solution, the German government has said it wants strong international banks to support Germany's export-oriented companies. The country still owns a large stake in Commerzbank after a bailout. It doesn't own a stake in Deutsche Bank.

Billionaire Stephen Feinberg's Cerberus Capital Management, which owns large stakes in both lenders, wouldn't stand in the way of a deal, people familiar with the matter have said.

Qatar, already a large Deutsche Bank shareholder through two investment vehicles, has committed to increase its stake through the country's sovereign wealth fund, Bloomberg reported this week. BLOOMBERG