Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Germany's No. 1 lender is leaner, more profitable and more financially robust than a year ago. That's good news for shareholders who have suffered through two years of losses, and taxpayers nervous about the health of the country's banking system. The bad news is that revenue is still underwhelming.

Growing Pains
A rising tide for Wall Street trading in Q1 failed to lift Deutsche Bank
Source: Bloomberg
Intraday times are displayed in ET.

Despite a blowout quarter for most of Wall Street's debt-trading divisions, Deutsche Bank AG's net revenue dropped 9 percent in the first three months of 2017. It blamed this largely on accounting one-offs, but even if you strip those out revenue was "broadly flat." Bond and currency trading revenue trailed the top five U.S. investment banks, as Bloomberg News reported, while equities revenue was 10 percent lower than the same period last year. Deutsche shares fell on Thursday.

The hope is that this is a hangover rather than a harbinger. Deutsche drew a line this month under its perceived financial weakness with an 8 billion-euro ($8.7 billion) capital hike, lifting its core capital ratio to more than 14 percent. It has settled some big legal bills. It has cut costs. It's a better-looking bank. A drop in its cost of funding should count for something and win client loyalty. HSBC analysts estimate that Deutsche could claw back 1 billion euros in revenue just by looking more normal.

A Bank of Greater Safety
The cost of insuring against a Deutsche Bank default has fallen since December
Source: Bloomberg data for senior 5Y EUR CDS

But it's hard to shake the feeling that this is a big investment bank all dressed up with few places to grow. Weak revenue in a more upbeat trading environment suggests rivals won't give up market share without a fight. Rock-bottom interest rates are a drag on lending margins. This all adds to the pressure on CEO John Cryan to keep cutting costs to hit profit targets. Last year's decision to slash bonuses was justified but it may have made it harder to retain and motivate staff. The bank isn't splurging cash to win business.

Trader Goes
Deutsche Bank's full-time staff numbers have fallen by over 3,000 in one year
Source: Company filings

This is frustrating for investors who have cheered Deutsche's survival but who now want to see it thrive. Cryan's cost-slashing shows the bank has learned lessons and is behaving less like a hedge fund and more like an intermediary. Yet a more competitive environment, with Wall Street stealing share and European rivals such as Credit Suisse Group AG raising capital too, is difficult to navigate. Return on equity, while going in the right direction, is still low at about 4 percent. The stock trades at half its book value.

Deutsche is still in turnaround mode. Cryan deserves credit for navigating some potentially terminal problems last year. His focus on capital strength and cost efficiency is right and interest rates will hopefully normalize. But the next few months will be the big test of whether the bank can truly raise its game.

Without a relative improvement in revenue from a beefed-up capital base and a pipeline of deals, hopes will fade for a smooth path back to normality.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net