By Simon Clark and Patricia Kowsmann
Deutsche Bank AG got a vote of confidence in its turnaround plan Thursday as U.S. investor Capital Group Cos. disclosed it has built a stake in the bank.
Capital Group, which has over $1.9 trillion in assets under management, is backing Deutsche Bank, with a 3.1% stake, while the troubled bank undertakes a broad restructuring of its businesses aimed at making it leaner and profitable.
Deutsche Bank's shares have jumped more than 30% so far this year, making it the second best performer in the Stoxx 600 index. The rise is in contrast to recent times when it has dealt with a series of legal challenges and struggled to convince investors of its business model.
Like several European banks, Deutsche Bank has been struggling to make money while interest rates remain low or below zero. The good news for Europe's most troubled major lender comes as the industry has showed mixed results in coping with those low rates and a sluggish economy in reporting fourth quarter earnings.
Executives continue to blame ultralow interest rates for making the business of lending more challenging. The extent of that challenge showed up in several banks' financial results. Deutsche Bank itself swung to a EUR5.3 billion loss ($5.84 billion) in 2019. In France, BNP Paribas SA and Société Générale SA cut profitability targets, as did UBS Group AG in Switzerland.
In Spain, Banco Santander SA's net income fell by 17% last year because of a write-down in the value of its U.K. operations. In Italy, UniCredit SpA swung to a loss in the fourth quarter, while in the Netherlands ING Groep reported lower pretax profit for the quarter than analysts expected.
The European Central Bank reduced its key rate by 0.1 percentage point to minus 0.5% and revived a bond-buying program in September. But the ECB, which also supervises the eurozone's largest banks, has pushed back recently by arguing banks should improve profitability by cutting costs, investing in technology and through mergers.
"Banks tend to blame the lack of profitability on external conditions, pointing to negative interest rate policies," Andrea Enria, the ECB's chief banking supervisor, said last week. He added that banks need to sharpen their managerial efforts, deploy effective strategies on digitization and achieve more radical improvements in cost efficiency.
Efforts to consolidate have been thwarted across the region by labor unions, politicians and incomplete European Banking Union legislation. Most notably, Deutsche Bank failed to merge with smaller German rival Commerzbank AG last year. The combination was opposed by labor unions concerned about thousands of job losses.
After the thwarted merger, Deutsche Bank moved to shrink and reorganize its global investment bank and focus on serving European companies and retail-banking customers. It also pledged to slash costs and cut 18,000 of its approximately 92,000 jobs by 2022.
BNP Paribas cut its profitability goal for 2020, saying Wednesday that monetary policy changes had "led to a more unfavorable interest rate environment than anticipated at the beginning of 2019." The Paris-based bank now expects a return on tangible equity -- a key measure of profitability -- of 10% this year, down from previous expectations of over 10.5%.
Société Générale said Thursday it is unlikely to deliver a return on tangible equity of 9% to 10% for the year, which it had targeted.
One bright spot for BNP Paribas was a sharp uptick in trading revenue in its investment bank where it performed better than its European peers and posted trading gains in line with U.S. banks including Citigroup Inc. and Goldman Sachs Group Inc.
UBS missed a target to make around 15% on capital, with a 12.4% return. Its new target is to make between 12% and 15% through the 2020-2022 cycle. UBS Chief Executive Sergio Ermotti said Jan. 21 the bank needed to lower its targets because of persistently low or negative interest rates.
ING net profit fell 31% in the fourth quarter, which Chief Executive Ralph Hamers described as "challenging" because of low interest rates. Provisions for bad loans rose 77% to EUR428 million.
Another positive was banks including BNP Paribas, Deutsche Bank, UniCredit and Santander reporting improved capital levels.
--Giovanni Legorano and Pietro Lombardi contributed to this article.
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