Deutsche Bank Profit Tumbles on Debt Crisis

02.02.2012 11:41

Bloomberg: Deutsche Bank AG (DBK), Germany’s largest bank, reported a 76 percent drop in fourth-quarter profit as Europe’s sovereign-debt crisis curbed trading and the company booked writedowns on holdings. The shares declined.
Net income fell to 147 million euros ($194 million) from 601 million euros a year earlier, the Frankfurt-based company said today in a statement. Earnings missed the 556 million-euro average estimate of 12 analysts surveyed by Bloomberg. The investment bank had a 422 million-euro pretax loss.
Chief Executive Officer Josef Ackermann, who is delivering full-year results for the last time before stepping down at the end of May, abandoned a goal of posting record annual profit in November as the debt crisis intensified. Deutsche Bank took charges related to litigation, Greek government bonds, Icelandic generic drug maker Actavis Group hf, a Las Vegas casino and its BHF-Bank AG unit, moves that smooth the way for the new management team.
“Fixed income had a poor quarter because it’s so linked to the sovereign debt crisis in Europe,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA who has an “underperform” rating on the stock. “That hit them hard.”
‘Mildly Better’
The shares fell as much as 2.8 percent in Frankfurt trading, and were 49 cents lower at 33.55 euros by 9:41 a.m. Deutsche Bank has advanced 19 percent since the European Central Bank said Dec. 8 it would offer unlimited three-year loans to lenders -- a decision Ackermann described to CNBC as important in easing some of the banking system’s “funding challenges.” Bloomberg’s 43-company European banks index climbed 16 percent in the period.
Anshu Jain, who will take over as co-CEO with Juergen Fitschen, said last week that 2012 has started “on a mildly better note” than 2011 ended.
“Broadly the situation has improved, particularly the one in Europe,” Jain, the 49-year-old head of the investment bank, told Bloomberg Television’s Erik Schatzker in Davos, Switzerland, on Jan. 26. “But look, the possibility of a tail event continues to hang over us.” Until that changes, “high volatility is the new norm, and one we’ll all need to just live with,” he said.
Debt Trading
New York-based JPMorgan (JPM) Chase & Co., the biggest U.S. bank by assets, posted a 23 percent decline in profit on lower investment-banking fees and revenue from trading stocks and bonds. Earnings at Goldman Sachs (GS) Group Inc., also based in New York, dropped 58 percent, leading the firm to cut compensation in response to falling revenue. Among the five largest Wall Street banks, only Morgan Stanley posted an increase in trading income, excluding accounting gains, in 2011.
Deutsche Bank scrapped in November its operating pretax profit forecast of 10 billion euros for 2011 and announced 500 job cuts amid a “significant and unabated slowdown in client activity.” Ackermann’s purchase of Deutsche Postbank AG (DPB) and Sal. Oppenheim Group to build up consumer-banking and wealth- management have failed to make up for lower investment banking.
The investment bank’s loss compared to a 603 million-euro pretax profit a year earlier and the 233 million-euro profit estimate from nine analysts. Revenue from debt trading dropped to 1.04 billion euros from 1.61 billion euros, missing the 1.47 billion-euro estimate of analysts, while equity trading revenue decreased to 539 million euros from 872 million euros.
Deutsche Bank booked costs of 380 million euros at the investment bank related to litigation and 154 million euros for U.K. and German bank levies.
Clearing the Slate
“Ackermann might be trying to clear the slate for the new management, but it still doesn’t look pretty,” said Dirk Becker, an analyst with Kepler Capital Markets in Frankfurt. “The litigation provisions could be anything in the end, so that isn’t very reassuring.”
Deutsche Bank consolidated the results of Postbank in December 2010, a purchase that followed the acquisitions of private-wealth manager Sal. Oppenheim and ABN Amro Holding NV’s commercial-banking operations in the Netherlands, as Ackermann added businesses with more predictable profits than investment banking.
Pretax earnings at the consumer banking unit climbed to 227 million euros from 222 million euros, missing the 384 million- euro average estimate in the analyst survey. The bank took charges on Greek bonds held at Postbank. Profit from the asset and wealth management business rose to 165 million euros, lower than the 180 million-euro estimate.
Deutsche Bank cited a “more challenging market environment” at the asset and wealth management division.
Capital Gap
European leaders are demanding that some of the region’s largest banks increase reserves after financial firms agreed to accept losses on Greek debt to help rescue the country. Deutsche Bank was among six German banks told to raise a total of 13.1 billion euros to boost core Tier 1 capital as a ratio of risk- weighted assets to 9 percent or more by June 30, after writing down the value of sovereign bonds.
The company said Dec. 8 that it expected to plug the 3.2 billion-euro gap calculated by the European Banking Authority six months early, without saying how it will meet the goal.
The German firm in November announced a strategic review of its global asset-management division, excluding operations of the DWS mutual fund unit in Germany, Europe and Asia. Executives decided last month to pursue a sale of the businesses, which have almost 400 billion euros in assets under management, according to two people with knowledge of the matter.
Analysts will be watching for any further signs the bank will change direction under its new leadership.
‘Strategic Changes’
“It’s going to be exciting if strategic changes are announced,” Olaf Kayser, an analyst with Landesbank Baden- Wuerttemberg who recommends investors buy the stock, said before the results were published. “The first steps are known, with the planned sale of asset-management operations.”
Deutsche Bank posted an impairment of 407 million euros related to Actavis, 97 million euros in expenses related to BHF- Bank and a 135 million-euro charge from the Cosmopolitan Resort & Casino in Las Vegas, which Deutsche Bank took over in 2008 when developer Ian Bruce Eichner defaulted on a loan. The writedowns contributed to a loss of 722 million euros at the corporate investments unit in the quarter.
The German lender took a 144 million-euro impairment charge on Greek bonds at its private clients and asset management unit, according to the statement.
‘Legal Risks’
Deutsche Bank said its core Tier capital ratio, a measure of financial strength, was 9.5 percent under Basel 2.5 rules at the end of the year. Risk-weighted assets rose by 44 billion euros in the fourth quarter as the bank adopted the stricter rules and implemented a “safety margin taken to cover unforeseen legal risks from the financial crisis,” according to the statement.
The company plans a dividend of 75 cents a share for 2011, unchanged from 2010, according to the statement.
For the full year, pretax profit at the corporate and investment bank and private clients and asset management unit totaled 6.6 billion euros in 2011 after 1 billion euros in charges at the investment bank and 200 million euros in “special net negative impacts” at the private and business clients division, Deutsche Bank said.
reporters on this story: Nicholas Comfort in Frankfurt