TheChek News Flow

Deutsche Bank AG’s DB -6.45% long struggle to make money shows little sign of easing.

Slumping investment banking and trading revenues took another bite out of profitability at the struggling German lender in the third quarter as it faces growing pressure to cut costs and stabilize earnings.

Shares of the bank ended at a record closing low of €8.87 in Frankfurt. They have fallen 10% this month and 44% this year. European banks are broadly expected to lag behind their U.S. peers, according to analysts, as continental banks kicked off earnings season Wednesday. The broader Euro Stoxx Banks index is trading at its lowest level since October 2016.

Germany’s largest lender said third-quarter profit fell 65% to €229 million ($263 million). Net revenue fell 9% to €6.2 billion from a year earlier, roughly in line with analysts’ expectations.

Still, Chief Executive Christian Sewing said the bank is “on track” to make a full-year profit. Deutsche Bank had said it expected full-year revenues to be flat from last year, but on Wednesday it changed that projection to “slightly lower.”

Analysts had expected Deutsche Bank’s companywide profit to fall in the third quarter while it slashes expenses following another management overhaul.

But one big persistent concern from investors and analysts is that Deutsche Bank’s intentional steps to shrink the bank will spiral into uncontrolled revenue loss, and Wednesday’s results aren’t likely to stem those concerns. Executives said Deutsche Bank is winning business, but for the most part that isn’t materially showing up in results, especially compared with competitors’ performance.

Investment-banking revenue declined 13% from a year earlier to €3 billion. The lender suffered 15% declines in both fixed-income and equities sales and trading revenues from a year earlier.

Its other two primary business units, commercial and retail banking and asset management, also suffered quarterly revenue declines of 3% and 10%, respectively.

Skepticism about Deutsche Bank’s long-term rein on costs—a challenge that has haunted it for years—surfaced again Wednesday. Chief Financial Officer James von Moltke said the bank is on track to meet cost targets of €23 billion and €22 billion, respectively, for 2018 and 2019. But he backed away from a previous €21 billion target for 2021, saying executives want to focus on near-term goals. “We hope to do better,” but to move to a different, cost-income target for 2021, he said. The comments spurred more questions about Deutsche Bank’s confidence in its projections.

Citigroup Inc. analysts on Wednesday cited “weak core divisional profitability” in Deutsche Bank’s earnings, noting that the investment bank “is still losing market share (which we fear will continue).” The lender’s retail-banking profits have also been disappointing, hurt by higher investment spending in the business, the analysts said.

Deutsche Bank is also trying to shed capital-consuming legacy assets, fix outdated technology and repair thorny relationships with regulators who have repeatedly criticized its compliance and systems controls. Deutsche Bank’s long fight to make money means it has less cash to spend on crucial fixes than most competitors, particularly U.S. banks that have poached business from European banks at home and abroad.

In April, Deutsche Bank fired its CEO and replaced him with longtime executive Mr. Sewing after three full-year posttax losses and a series of restructurings that failed to deliver on cost-cutting promises.

Mr. Sewing said Wednesday that the bank’s pretax profit in the quarter—while lower—along with head count reductions and capital improvements, marked “another milestone” toward the company’s goals for sustained profitability. “We are on track to be profitable in 2018, for the first time since 2014,” he said.

Broad investor support for Mr. Sewing’s early initiatives, including steep job cuts and a back-to-roots focus on European clients, hasn’t helped Deutsche Bank shares.

Executives face unrelenting investor speculation that Deutsche Bank could end up merging with German rival Commerzbank AG . Neither bank has directly addressed potential merger plans, but Deutsche Bank executives have said they are focused on their current structure and strategy.

Mr. Sewing told analysts Wednesday morning that Deutsche Bank has maintained its global profile in important ways, such as grabbing lead roles on public stock offerings. He said strategic decisions made earlier this year are hurting short-term results but will pay off in the long run, and said the bank is proving its discipline in boosting capital and controlling risks.

Naval Group and Fincantieri join forces despite souring relations between countries

France and Italy have finally taken another step forwards in their fledgling military shipbuilding alliance, a rare if limited sign of progress in European defence consolidation and a sign of co-operation between the two clashing governments.

Late on Tuesday, France’s state-owned Naval Group and Italy’s Fincantieri started to put some flesh on the bones of their attempt at co-operation.

“It is necessary to consolidate now. Governments are aware . . . that not doing this has huge costs,” said Iskandar Safa, chairman of Privinvest, the parent company of shipbuilding group German Naval Yards.

The deal, codenamed Poseidon, is tentative and less ambitious than the original plan suggested last year — a “fig leaf”, in the words of some analysts — but it is more than some industry watchers thought was possible in the face of political barriers.

Relations between the two countries have soured since Italy formed an anti-establishment government in spring.

“If they want to see me as their main opponent, they’re right,” said French president Emmanuel Macron in August after a meeting of far-right populist leaders, Italy’s Matteo Salvini and Hungary’s Viktor Orban.

The two groups announced a 50-50 joint venture aiming to make them more competitive in international tenders, primarily against rivals from the US but also increasingly from countries such as China and South Korea.

They will also look for efficiencies in purchasing, testing and research and development.

An underpinning agreement between the two governments, including over issues of sovereignty, is still in the works but is expected next year.

But analysts criticised the deal. It is “very cautious” and its “scope of activities appears at this stage limited”, said Hélène Masson, an analyst at the Fondation pour la Recherche Stratégique.

Originally, a cross-shareholding structure of between 5 per cent and 10 per cent between the two companies was mooted in order to demonstrate commitment to the alliance, which was considered crucial to make the partnership durable.

That idea has now been pushed back in part because of political headwinds and in part because of concerns from suppliers in both countries about losing market share, rendering the “deal a no-deal”, according to one person close to the agreement.

The cross-shareholding “might be considered again in the future”, according to French government officials, while the chief executive of Naval, Hervé ́́ Guillou, simply says of closer union that “we will see step by step”.

As importantly, analysts add that while some joint projects are envisioned, this agreement lacks a large common programme to drive co-operation.

However, the alliance, which excludes submarines, does represent tentative progress.

It was conceived in September last year when French president Emmanuel Macron and then Italian prime minister Paolo Gentiloni stood together in Lyon to celebrate the takeover of a French shipyard, STX, by Fincantieri.

The two leaders also announced the creation of a study group to explore creating a “European champion” in military shipbuilding. The logic behind the plan mirrors the logic for wider defence consolidation in Europe: the crowded sector faces cost pressures and increasing competition in export markets.

But there has been little movement so far as commercial logic runs up against governments, which have conflicting strategic imperatives, are reluctant to share technologies or lose expertise, and know that shutting industrial sites is a sure-fire way to lose votes.

“Successful European joint ventures ultimately pool industrial capacity and eliminate manufacturing overlap . . . The problem is that shipbuilding is so incredibly sensitive that nobody is willing to make that commitment,” said Sash Tusa, at Agency Partners.

The deal between Fincantieri and Naval, the “only opportunity” for Europe to create a global player in military shipbuilding, according to Giuseppe Bono, Fincantieri’s chief executive, had been considered under threat after the election of Italy’s anti-establishment government in March.

European officials describe Franco-Italian relations as being at an all-time low. “France and Italy are at war,” said one senior Italian politician.

“It is not Russia which is against us but the French,” Giulio Sapelli, an economics adviser to Italy’s vice premier Matteo Salvini told business leaders last week. The event was attended by Mr Salvini.

Mr Sapelli, who was Mr Salvini’s professor at university, went on to express a nationalistic view increasingly held in Rome about ownership of corporate Italy.

Elaborating on his theory of France being hostile to Italian interests, Mr Sapelli suggested French chief executives of Italian financial groups UniCredit and Generali only intended to orchestrate a sale of those groups to French buyers.

However, French government officials say there has always been a political will to push ahead with this particular project despite frictions between France and Italy.

And Italian executives say beneath the political tensions, technocrats are seeking to keep transalpine relations on a relatively even keel.

The deal is a result of those efforts even if its form makes it nothing more than “a fig leaf designed to make it look as if there is progress”, according to Mr Tusa, which does not go far enough in merging the two companies.

“You have FREMM, the most successful global frigate programme of the last decade, and then you go from that saying ‘OK, we won’t do that for the next time’,” said Mr Tusa. “If you had merged the programmes, then merging the two companies would have been very easy, now it’s impossible.”

Uefa to oppose expansion of Club World Cup and potential threat to Champions League

A SoftBank-led proposal to create new tournaments with Fifa faces a make-or-break vote on Friday, with the backers of the $25bn plan set to walk away unless international football’s governing body can secure agreement among its divided membership. 

The vote marks a crucial moment for Gianni Infantino, Fifa president, who wants to radically transform the sport through an expansion of the Club World Cup, an annual competition between seven of the globe’s top clubs, as well as create a new league contest for national sides. 

Delegates from Fifa’s 37-member governing council are gathering in Kigali, Rwanda for showdown talks on the proposals that have polarised powerful factions and major clubs in world football. 

Fifa has engaged in secret talks for months with a consortium of international investors including Japan’s SoftBank, which has pledged to inject $25bn into a Fifa-controlled joint venture that would run the tournaments. 

Mr Infantino has previously said the investors represented “major interests and multinationals in Asia, Europe and North America”. 

A person close to the talks said there was no longer any sovereign involvement in the investor proposal, after heavy speculation that the entities close to the governments of Saudi Arabia and Abu Dhabi formed part of the group. 

There is growing concern among the group about Mr Infantino’s ability to carry the proposal through its ruling council, having already postponed a vote on the plan earlier in May. 

Fifa and the consortium will be forced to abandon their talks unless requisite support is secured this week, according to a person close to the negotiations. 

Uefa, European football’s governing body, was set to vote against the proposals, with people close to the body saying that all nine Uefa members on the Fifa council were expected to remain steadfast in their opposition. 

“We’re not going to vote for it,” said a person close to Uefa’s leadership, adding that leading European clubs and leagues have been consulted and would back its stance. “Given that [Fifa] are wanting 50 per cent of the competition to be made up of European clubs, that’s not a good start for the competition.” 

According to documents seen by the Financial Times, Mr Infantino will present a number of options which each involve expanding the Club World Cup from seven teams to 24. 

The first envisages the competition taking place every four years, over 18 days “in June, the year before the Fifa World Cup”. The second would be a be a “yearly competition, as a pre-season tournament in July-August”. While a third option is an annual competition “in another time slot to be discussed further.” 

Uefa is planning to object to all the options believing they represent a threat to the Champions League, considered the pinnacle of the club game, which draws about €2.5bn in broadcasting and sponsorship revenues every year. 

A separate proposal to create a global “nations league” competition — expanding on an initiative that Uefa has already implemented for European national sides — is seen as less contentious. 

For months, Fifa members have complained that they have been provided little information over the identity of investors in the SoftBank-led group. 

A spokesman for the body said: “Fifa is not aware of any threat and remains, as always, open for discussion. That is the main objective of the council meeting and to speculate on the conclusions of these discussions is obviously premature.”

SoftBank declined to comment.

Oil and gas companies need to increase annual investment by 20 per cent or face a global supply crunch from 2025, a leading consultancy has warned.

An analysis by Wood Mackenzie found that the current industry recovery has been more gradual than in previous cycles, with a dearth of funds being pumped into new production.

This could lead to a supply gap from the middle of next decade, pushing prices upward. It could also put increased pressure on companies’ growth targets, triggering increased merger and acquisition activity in the coming years.

“The recovery in investment has been slower and shallower than other upturns,” said Malcolm Dickson, head of European upstream research at Wood Mackenzie. “We need to see investment to meet demand for oil and gas, which we see being robust in the long term, and to meet company growth targets.”

The warning comes as the industry cautiously emerges from a downturn that saw the price of crude collapse by 75 per cent between mid-2014 and early 2016, to below $30 a barrel at its lowest point. While prices have now seen a resurgence, reaching more than $80 a barrel in recent weeks, producers remain wary of investing capital into new projects.

Development spending rose 2 per cent in 2017 and is expected to rise 5 per cent this year. Wood Mackenzie predicts this will increase from a low of $460bn in 2016 to around $500bn in the early-2020s — well below the peak of $750bn in 2014. But it would need to hit annual levels of around $600bn to meet demand for oil and gas over the coming decade, according to the consultancy.

Investment is likely to remain low in the short term, however, with companies taking a conservative approach to new projects, preferring smaller scale investments with quicker returns to larger, more expensive ones. They are also under pressure to return money to shareholders through dividends and share buybacks.

“Shareholders are looking to benefit from sustained improvement in company cash return. They don’t wish to see companies substantially increase investment budgets at this stage in the cycle,” said Norman Valentine, an analyst at Wood Mackenzie.

Shale oil in the US is likely to be a key bright spot for investment in the coming years, with investment reaching 20 per cent above 2014 levels by 2023, according to Wood Mackenzie’s base case scenario. Liquefied natural gas is also likely to see increased activity, as it enters a new cycle. Investment in other areas is likely to be more muted, however.

The analysis also found that successful exploration would be important to restock inventories, but exploration budgets were slashed by 60 per cent during the downturn and have yet to recover.

24 OCT 2018

Following market rumors, April [EPA: APR], the French-listed insurance broker, announced on 23 April that it had initiated discussions with its majority shareholder as part of the analysis of the various strategic options and possible changes in its shareholding in the company's capital. The company confirmed that it has received preliminary expressions of interest.

Bloomberg reported today (24 October) that the suitors include private equity firms CVC Capital Partners, KKR & Co. and BC Partners. The report cited people familiar with the matter.

BC Partners is the owner of this publication.

April is controlled by Evolem (65.1%), the investment firm of founder Bruno Rousset. The market capitalization stands at EUR 611m as at 24 October.

Big Issue and Experian tie-up allows details to be logged on credit histories

Regular rental payments will now be recognised by one of the main credit reference agencies to help tenants with little credit history to apply for a mortgage.

The Rental Exchange, a partnership between credit reference agency Experian and the Big Issue group, allows tenants to keep an official record of their history of rental payments. From this week that history will be displayed in Experian’s credit reports, which are used by lenders and other financial institutions to judge a person’s creditworthiness.

The inability of tenants who may have paid rent over many years to use that evidence when applying for mortgages, loans or other financial services has been a growing source of frustration for aspiring homeowners. Last year, a petition to the government over the issue attracted 147,000 signatories and was debated in parliament.

While the Rental Exchange scheme was set up in 2014 for institutional landlords such as local authorities and social housing providers, private tenants can also self-report their rental payments to the scheme, using rent reporting services CreditLadder or Canopy.

Experian said more than 1.2m tenants would now see their rental payments appear on their credit reports. It estimated that the credit score of nearly 80 per cent of tenants would improve if rents were included in their data.

Clive Lawson, managing director of Experian Consumer Services, said it was right for lenders to be able to recognise a history of regular rental payments in a similar way as mortgage payments.

“We’re already working with a range of lenders who want to use rental data to improve their understanding of a person’s financial situation so they can make higher quality decisions,” Mr Lawson said.

Ray Boulger, senior technical manager at mortgage broker John Charcol, said it was a “good first step” to making rental payment information available to lenders. “If lenders can see regular payments on the rent, that should enhance the credit score. It’s going to help some first-time buyers.”

But Mr Boulger added that would-be mortgage borrowers may still fall short when judged on the stringent affordability requirements that were put in place after the financial crisis.

Although an applicant may be able to point to rent payments as evidence of their ability to repay a mortgage at the interest rate offered, affordability tests require them to show lenders that they could afford the loan at a rate at least 3 per cent higher than the lender’s standard variable rate — a requirement that has proved difficult for many to satisfy.