Net income fell to about 700 million euros ($847 million) from 1.2 billion euros a year earlier, according to preliminary results the Frankfurt-based lender disclosed in a statement yesterday. That missed the 999 million-euro average estimate of six analysts surveyed by Bloomberg. Pretax profit slid to about 1 billion euros from 1.8 billion euros. That compares with analysts’ estimate of 1.5 billion euros.
Investment banks are fighting to reduce costs with job cuts as a slump in trading by clients amid Europe’s debt crisis reduces revenues. Deutsche Bank said it will compensate for the profit shortfall by stepping up “de-risking measures” to fulfill stricter capital requirements.
“The sovereign debt crisis is affecting the economy as a whole and Deutsche Bank’s earnings reflect that,” said Andrew Stimpson, a banking analyst at Keefe, Bruyette & Woods Ltd. in London. “The costs were higher than I had expected, apparently because of a weaker euro, and that’s a trend that is continuing in the third quarter.”
Deutsche Bank has plunged 22 percent this year, more than the 8.8 percent decline for the Bloomberg Europe Banks and Financial Services Index, which tracks 38 stocks. The German lender fell 2.2 percent to 22.95 euros at 9:15 a.m. in Frankfurt. A close at that price would be the lowest since Sept. 26.
“Although down to a very low level, the stock should remain under pressure,” Natixis analysts wrote in a note today. “Our forecasts and target price are under review.”
The euro’s decline against the dollar and British pound increased costs in those regions relative to Deutsche Bank’s home base as Europe’s debt crisis weighed on the common currency in the second quarter. The euro fell 5.1 percent relative to the dollar during the second quarter.
Non-interest expenses probably rose to 6.6 billion euros from 6.3 billion euros as net revenue fell to about 8 billion euros from 8.5 billion euros, according to the statement. The earnings are the first under Deutsche Bank’s new dual leadership of Anshu Jain, 49, and Juergen Fitschen, 63, who took over from Chief Executive Officer Josef Ackermann, 64, at the end of May.
Investment Bank Jobs
The company will publish full second-quarter earnings on July 31, as scheduled.
The bank cut about 500 investment bank jobs after scrapping its operating pretax profit forecast of 10 billion euros for 2011 in October amid what it then called a “significant and unabated slowdown in client activity.”
Deutsche Bank is considering cutting about 1,000 positions at the unit as revenue declines, a person familiar with the matter said July 19.
That’s less than some of the firm’s competitors, which may signal that Deutsche Bank expects revenues to recover and wants to have the staff to benefit from a rebound, said Michael Seufert, a banking analyst with Norddeutsche Landesbank.
“It’s always been Jain’s strategy to target top-five if not top-three spots in investment banking because that’s where you make profits necessary to justify the investment,” said Seufert, who recommends investors hold the stock. “To do that you need the know-how and personnel.”
Headcount at Morgan Stanley (MS) will decline by about 700 in the second half, bringing total 2012 staff reductions to 4,000, Chief Financial Officer Ruth Porat said in a July 19 interview.
Credit Suisse Group AG (CSGN) announced plans last year to cut 3,500 jobs and lower expenses by 2 billion francs. Switzerland’s second-biggest bank said July 18 that it was planning to cut costs by an additional 1 billion francs by the end of 2013, without providing details of job losses.
Larger Zurich-based rival UBS AG (UBSN) disclosed 3,500 job cuts last year, with about 1,575 of those at the investment bank.
Western European financial firms have announced more than 21,700 job cuts this year, compared with more than 107,000 in 2011, data compiled by Bloomberg show.
Credit Suisse’s plan to bolster capital by 15.3 billion francs ($15.4 billion), unveiled July 18, prompted Bankhaus Metzler analyst Guido Hoymann and Christopher Wheeler at Mediobanca SpA (MB) to say Deutsche Bank may feel pressure to boost reserves. The German bank was the third-least capitalized of Europe’s 10 largest banks at the end of 2011, according to data compiled by Bloomberg.
It is “good news” that Deutsche Bank plans to mitigate the profit shortfall by cutting risk, said Philipp Haessler, an Equinet AG analyst. “It seems that there is no risk of a capital increase, which would be bad for investors.”
The firm said it can still achieve a core Tier 1 capital ratio target of 7.2 percent for the beginning of next year, a figure simulated to account for fully implemented Basel III rules that begin taking effect in 2013.
“Lower full-year net income projections will be mitigated by additional de-risking measures,” Deutsche Bank said in the statement, referring to external analyst estimates the firm uses as a component of its simulation of Basel III rules.
“It’s not like they have a huge batch of assets they want or need to sell,” said Dirk Becker, an analyst with Kepler Capital Markets in Frankfurt. “They’ll be looking at short-term assets and considering, when they come to maturity, whether they are worth prolonging or just letting them expire to release capital.”
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