Deutsche Bank AG said business conditions worsened this month after first-quarter profit at Germany’s biggest bank dropped more than analysts expected following a charge from the sale of drugmaker Actavis Group hf.
Deutsche Bank declined the most in almost four months in Frankfurt trading after net income fell 33 percent to 1.38 billion euros ($1.82 billion) from a year earlier. That missed the 1.56 billion-euro average estimate of nine analysts surveyed by Bloomberg.
Chief Executive Officer Josef Ackermann is reporting earnings for the last time before handing over to investment bank chief Anshu Jain and Germany head Juergen Fitschen next month. While investment-banking earnings rebounded from the preceding quarter with higher revenue from fixed-income trading, Ackermann echoed comments made yesterday by Credit Suisse Group AG CEO Brady Dougan that conditions have since deteriorated.
“Financial markets remain cautious -- as we have seen in April, with investor risk appetite markedly lower,” Ackermann said in a letter to shareholders published on the bank’s website. “Investors, particularly private investors, remained wary after the market turmoil of last year.”
Deutsche Bank fell as much as 6 percent and was down 4.2 percent to 32.71 euros as of 3:11 p.m. in Frankfurt. The stock is the fourth-worst performer on the 43-company Bloomberg Europe Banks and Financial Services Index, which declined 2.2 percent, led by Societe Generale SA
“I’m a little disappointed as they missed expectations, even if they were a little on the high side because of one-time items,” said Christian Hamann, an analyst with Hamburger Sparkasse who recommends investors hold the stock. “The cool-off in April isn’t such a great outlook.”
The slowdown in April hasn’t been “significant” and Deutsche Bank needs to assess the effect of the Easter holidays on revenue, according to Chief Financial Officer Stefan Krause. The “positive momentum” the European Central Bank provided for financial markets with three-year loans in December and February slowed in April, he said in a Bloomberg Television interview.
“Most people would say April was a bit sluggish compared to the first three months,” Barclays Plc CEO Robert Diamond said today after Britain’s second-biggest bank by assets posted first-quarter profit that beat analyst estimates as revenue at its investment banking unit rebounded.
Pretax profit at Deutsche Bank’s investment banking unit fell to 1.72 billion euros in the first quarter from 2.29 billion euros a year earlier and compares with a 422 million loss in the fourth quarter. That beat the 1.64 billion-euro average estimate of eight analysts.
Revenue from debt trading dropped 8.1 percent to 3.39 billion euros from a year earlier and compares with 1.04 billion euros in the preceding three months. That beat the 3.12 billion-euro estimate of six analysts surveyed by Bloomberg.
While equity trading revenue also rebounded from the fourth quarter, it was down 23 percent to 726 million euros from a year ago. That missed the 750 million-euro estimate of analysts.
JPMorgan Chase & Co., the biggest U.S. bank, reported a 3.1 percent earnings decline for the first quarter on April 13. Citigroup Inc. said April 16 that profit fell 2.3 percent while Goldman Sachs Group Inc. posted a 23 percent slump in earnings the next day.
Goldman Sachs reported a 20 percent decline in fixed-income trading revenue while JPMorgan’s revenue from that business fell 11 percent and Citigroup’s slid 4 percent.
“While credit spreads have widened, there’s still been a degree of uncertainty around the market which has clearly affected most banks’ fixed-income numbers,” said Christopher Wheeler, an analyst with Mediobanca SpA. “The second quarter started badly. What’s going to be the saving grace of these banks is that the third and fourth quarter shouldn’t be as dreadful as they were last year.”
Deutsche Bank posted a 26 percent pretax return on equity in the first quarter while reducing trading risk at its investment banking unit, Krause said.
“We did not have any valuation-driven profitability this quarter, so it was pure client flow profitability in our investment bank at very much reduced levels of risk,” he said. “I wouldn’t see any reason why this couldn’t be maintained.”
Deutsche Bank announced 500 job cuts in October after scrapping its operating pretax profit forecast of 10 billion euros for 2011 amid a “significant and unabated slowdown in client activity.” That program has been completed, Krause said today.
Pretax earnings at the consumer banking unit fell to 413 million euros from 788 million euros, missing the 466 million euros analyst estimate. Deutsche Bank booked a gain of 263 million euros related to its stake in China’s Huaxia Bank Co. in the first three months of 2011.
Brokerage revenues were lower at the private and business clients division “reflecting the more risk-averse mood among private customers in Germany,” Ackermann said in the letter.
Profit from the asset and wealth management business fell 25 percent to 142 million euros from a year earlier. Analysts had expected 198 million euros, according to the Bloomberg survey.
The ECB awarded lenders more than 1 trillion euros in December and February to keep credit flowing to the economy as Europe’s debt crisis drove up borrowing costs. Deutsche Bank tapped the ECB for a “small amount” for some businesses in continental Europe, Krause said today.
Global banks are gearing up for tighter rules on capital from the Basel Committee on Banking Supervision, known as Basel III, to make lenders more resistant to shocks in financial markets. Deutsche Bank reiterated last week that the firm doesn’t need to sell shares to meet its capital requirements.
Deutsche Bank said late yesterday that it took a 257 million-euro writedown tied to the sale of Actavis to Watson Pharmaceuticals Inc. in the first quarter. It also took 213 million euros of litigation charges at its investment banking unit. The company didn’t detail the charges.
The divestment of Actavis will raise Deutsche Bank’s core Tier 1 capital ratio, a measure of financial strength, by 6 basis points this year via a 290 million-euro capital boost, the company said.
“They’ll be very pleased about the Actavis deal because the investment carries a high capital weighting and hence the sale will see a large decline in risk-weighted assets,” said Wheeler, who recommends investors sell the stock.
In February, the German bank chose Guggenheim Partners as the potential buyer for its DWS mutual funds in the Americas, the advisory units for institutional investors and insurance firms, and its RREEF real estate and infrastructure division.
The bank hasn’t finalized details of a potential sale of asset management units to Guggenheim, Krause said.
“There are significant decisions still to be made and significant positions still to negotiate,” said Krause, citing the conditions and components of the sale.