(Updates with closing share price in fifth paragraph, CFO comments on risk-weighted assets in 23rd.)
Feb. 2 (Bloomberg) -- Deutsche Bank AG, Germany’s largest bank, said fourth-quarter profit fell 76 percent, more than analysts estimated, as Europe’s debt crisis curbed trading and the company wrote down holdings.
The bank fell as much as 3.1 percent in Frankfurt trading after reporting net income of 147 million euros ($194 million), below the 556 million-euro average estimate of 12 analysts surveyed by Bloomberg. The investment bank posted a 422 million- euro pretax loss.
Chief Executive Officer Josef Ackermann, who steps down in May, said 2012 will be another “challenging year.” With his departure approaching, Deutsche Bank set aside funds for litigation and wrote down holdings in Greek government bonds, Icelandic generic drug maker Actavis Group hf, a Las Vegas casino and its BHF-Bank AG unit. The charges led to a loss of 722 million euros at the corporate investments unit.
“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 shares fell 0.4 percent to close at 33.895 euros in Frankfurt. Deutsche Bank has advanced 20 percent since the European Central Bank said Dec. 8 it would offer unlimited three-year loans to lenders -- a decision Ackermann described to CNBC last week as important in easing some of the banking system’s “funding challenges.” Bloomberg’s 43-company European banks index climbed 17 percent in the period.
Anshu Jain, who takes over as co-CEO with Juergen Fitschen in May, told reporters today at a press conference in Frankfurt that January was “more gratifying” for the investment bank than the second half of 2011.
Deutsche Bank wasn’t alone in reporting lower profit in the final three months of last year. New York-based JPMorgan 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 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 its forecast for operating pretax profit of 10 billion euros for 2011 in November and announced 500 job cuts amid a “significant and unabated slowdown in client activity.” Ackermann’s purchase of Deutsche Postbank AG and Sal. Oppenheim Group to build up consumer-banking and wealth-management couldn’t make up for lower investment banking.
“The scale of the economic slowdown in Europe and around the world will largely depend on further progress in solving the sovereign debt crisis,” Ackermann said at the press conference. This will be “another very challenging year.”
Deutsche Bank sees a pretax return on equity of about 15 percent to 18 percent in the near term because higher capital requirements are weighing on the industry, Ackermann said. It may be able to reach about 20 percent in terms of pretax ROE in the longer term after it sheds legacy assets, he said today. In the past, Ackermann had set a goal of 25 percent.
The investment bank’s loss compared with 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.
“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.”
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.
Investment banks won’t reach their previous peak revenue levels in the foreseeable future even if market conditions improve, Ackermann said. The German firm is in “an ideal position to continue our growth and further increase profitability” at the corporate and investment bank, he said.
Pretax earnings at the consumer banking unit climbed to 227 million euros from 222 million euros, missing the 384 million- euro average estimate of analysts. The bank took charges on Greek bonds held at Postbank. Profit from the asset and wealth- management business rose to 165 million euros, missing the 180 million-euro estimate of analysts.
Deutsche Bank cited a “more challenging market environment” at the asset and wealth-management division.
In November, the company 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.
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.
Deutsche Bank is “well capitalized and will be able to meet the stricter regulatory capital requirements before the relevant deadline,” Ackermann said, referring to the EBA targets.
Germany’s largest lender expects savings to exceed 1 billion euros in 2012, strengthening its capital base and creating “scope for investments in growth fields,” he said.
Deutsche Bank’s core Tier 1 ratio at the end of 2011 was 9.5 percent under Basel 2.5 rules, a measure that differs in some respects from the EBA criteria. Risk-weighted assets rose by 44 billion euros in the fourth quarter as the bank adopted the stricter rules and set aside 1 billion euros in capital for potential losses related to lawsuits, according to the statement.
“To protect the bank and the bank’s capital, we took the decision to take this 1 billion additional capital hit, which was agreed with our regulator,” Chief Financial Officer Stefan Krause said on a conference call today. “Either these losses would materialize or we would work through further settlements and the claims would go away, then obviously this capital charge would go away again.”
The company plans a dividend of 75 cents a share for 2011, unchanged from 2010, according to the statement.
Deutsche Bank booked 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 it took over in 2008 when the developer defaulted on a loan. The lender took an 144 million- euro impairment on Greek bonds at its private clients and asset management unit, according to the statement.
Ackermann told reporters that the one-time writedowns in the fourth quarter were partially a “farewell gift” to the management team that will lead the bank when he leaves at the end of May.
--With assistance from Angela Cullen in Frankfurt. Editors: Frank Connelly, Steve Bailey
To contact the reporters on this story: Nicholas Comfort in Frankfurt at firstname.lastname@example.org; Aaron Kirchfeld in Frankfurt at email@example.com
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