Bloomberg News

Deutsche Bank Investment Bank Profit Drops 63% on Trading

July 31, 2012

Deutsche Bank Co-CEOs Anshu Jain and Juergen Fitschen

Anshu Jain, left, and Juergen Fitschen, new co-chief executive officers at Deutsche Bank

Deutsche Bank AG (DBK), Germany’s biggest bank, said second-quarter earnings at its investment bank slid 63 percent as revenue from trading and issuing securities shrank amid Europe’s debt crisis.

Pretax profit at the corporate banking and securities unit slid to 357 million euros ($439 million) from 969 million euros in the same period a year earlier, the Frankfurt-based company said today in a statement. That missed the 835 million-euro average estimate of eight analysts surveyed by Bloomberg.

Investment banks are cutting staff to reduce costs as the debt crisis curbs trading and leads to a slump in stock and bond offerings. Anshu Jain and Juergen Fitschen, Deutsche Bank’s new co-chief executive officers, must grapple with declining revenue at the division, rising capital requirements and regulatory probes into the setting of interbank lending rates.

“The cost income ratio and the corporate and investment bank are quite weak,” said Andrew Lim, an analyst with Espirito Santo Investment Bank who recommends investors sell the stock. “It is disappointing that the bank did not announce any new cost or capital measures in the morning. There is nothing that should drive the stock forward.”

Deutsche Bank fell 1 percent to 24.61 euros as of 9:51 a.m. in Frankfurt. That extended the stock’s decline to 16 percent this year, compared with the 0.5 percent gain for the Bloomberg Europe Banks and Financial Services Index, which tracks 38 stocks.

Euro Decline

Deutsche Bank’s second-quarter profit declined 46 percent to 650 million euros, the company said, after it reported last week an estimated net income figure of about 700 million euros. The bank said the euro’s decline against the U.S. dollar and British pound drove up costs in those regions relative to Germany.

Non-interest costs at the investment bank climbed to 3.05 billion euros in the quarter from 2.91 billion euros. Analysts estimated costs of 2.77 billion euros for the unit in a Bloomberg survey. Debt-trading revenue at the division fell to 2.18 billion euros from 2.35 billion euros. That compares with an analysts’ estimate of 2.13 billion euros.

Revenue from selling equity for clients plummeted 64 percent to 89 million euros in the second quarter from a year earlier while income from placing debt fell 11 percent to 284 million euros in the period, according to Deutsche Bank.

“The European sovereign debt crisis continues to weigh on investor confidence and client activity across the bank,” Jain and Fitschen said in the statement.

Deutsche Bank cut its net sovereign risks related to Greece, Italy, Ireland, Portugal and Spain to 3.91 billion euros at the end of March from 3.94 billion euros three months earlier, according to a presentation published on the company’s website. Risks related to Spain fell to 873 million euros from 1.36 billion euros while those related to Italy rose to 2.52 billion euros from 1.95 billion euros, the slides show.

Jain, 49, and Fitschen, 63, who took over from Josef Ackermann, 64, at the end of May, will provide an update on their strategic review on a conference call at 2 p.m. Frankfurt time.

“Investors and companies are holding back from bond and share sales because of the high level of uncertainty on markets from Europe’s sovereign debt crisis,” said Michael Seufert, an analyst with Norddeutsche Landesbank in Hanover who recommends investors hold the stock. “Right now, the bank is focused on damage limitation and minimizing risk in this environment.”

JPMorgan Chase & Co. (JPM:US), Bank of America (BAC:US) Corp., Citigroup Inc. (C:US), Goldman Sachs Group Inc. (GS:US) and Morgan Stanley (MS:US) had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion four years ago. The firms blamed the decline on low interest rates and a drop in trading and deal-making driven by concerns about European government finances and slowing growth in the U.S. and China.

UBS AG (UBSN), Switzerland’s biggest bank, had a second-quarter loss at its investment bank, causing profit to slump 58 percent, according to an earnings report today.

Commerzbank AG (CBK), Germany’s second-largest bank, yesterday reported second-quarter pretax profit that fell short of analysts’ estimates after saying it would sell its stake in Ukraine’s Bank Forum JSC and take a charge of 286 million euros.

Job Cuts

Deutsche Bank is considering cutting about 1,000 positions at its investment bank as revenue declines, a person with knowledge of the matter said July 19. The cuts will be mostly outside Germany, where the firm’s investment banking operations are focused, said the person, who asked not to be identified as Deutsche Bank’s plan hadn’t been made public.

That would come on top of a completed plan to cut 500 jobs at the investment bank, announced in October.

Compensation and benefits at the division which comprises the investment bank and global transaction banking units fell to 1.29 billion euros in the second quarter from 1.39 billion euros a year earlier while severance payments rose to 45 million euros from 29 million euros, according to Deutsche Bank.

The bank’s compensation as a ratio of net revenues rose to 42 percent from 39 percent as the firm accrued a higher amount of deferred pay, according to a presentation published on Deutsche Bank’s website today.

Pretax profit at Deutsche Bank’s private and business clients unit, which includes its consumer-banking operations, fell to 398 million euros in the second quarter from 458 million euros a year earlier. That beat the 344 million-euro average estimate of eight analysts surveyed by Bloomberg and outstripped earnings at the investment bank.

The asset management division’s pretax profit slumped to 35 million euros in the second quarter from 227 million euros as the bank booked 50 million euros in costs related to a review of the unit and lower client activity, according to Deutsche Bank’s statement.

The units up for sale in that process were unable to win business during the review, according to the presentation. Deutsche Bank scrapped a plan to sell its RREEF infrastructure and real estate unit to Guggenheim Partners LLC in June after exiting talks over the sale of three other asset management units to the U.S. investor in May.

Deutsche Bank is “committed” to its asset and wealth management unit, according to the presentation.

Banks are under orders from regulators to raise capital to avoid a repeat of the taxpayer-funded bailouts of the 2008 financial crisis. Deutsche Bank, the third-least capitalized of Europe’s 10 biggest banks at the end of 2011, came under more pressure after Credit Suisse Group AG (CSGN) bowed this month to demands from the Swiss National Bank to increase reserves.

After announcing profit that missed analysts’ estimates last week, Deutsche Bank said it will expand its risk reduction program to meet new capital requirements, known as Basel III, that begin to take effect next year.

Deutsche Bank expects its assets weighted according to risk will jump to 475 billion euros at the beginning of 2013 from 385 billion euros at the end of the year, assuming a gradual implementation of Basel III rules, according to the slides.

That increase would be higher if the bank didn’t plan on cutting an additional 29 billion euros in risk-weighted assets, the presentation shows. The costs of that reduction aren’t reflected in the simulation, according to Deutsche Bank.

Investors are also looking to today’s conference call for information on Deutsche Bank’s role in a global probe into possible interest-rate manipulation.

Libor Probe

The two-year investigation, which involves regulators on three continents, has touched as many as 18 financial institutions that help set London and Tokyo interbank offered rates for dollars, euros and yen. Libor is the benchmark for $500 trillion of securities and is the basis for interest rates on securities from mortgages to derivatives.

Deutsche Bank said in March that the U.S. Department of Justice, the U.S. Commodity Futures Trading Commission, the Securities and Exchange Commission and the European Commission were among watchdogs that subpoenaed the lender or requested information. The requests relate to periods between 2005 and 2011, the bank said at the time, adding that it’s cooperating with the inquiries.

Legal expenses stemming from probes into manipulation of Libor could range from $59 million for Lloyds Banking Group Plc (LLOY) to as much as $1.04 billion for Deutsche Bank and $1.06 billion for Edinburgh-based Royal Bank of Scotland Group Plc, according to estimates published by Morgan Stanley analysts Betsy Graseck and Huw van Steenis. The costs probably would apply in 2013 and 2014, the analysts, who are based in New York and London respectively, wrote in a July 12 note.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Annette Weisbach in Frankfurt at aweisbach1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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