Deutsche Bank AG, Germany’s biggest bank, said this year will be challenging after a surge in legal costs and lower debt trading revenue spurred a surprise fourth-quarter loss. The shares slumped.
Depressed interest rates in Europe and declining demand for banking services are also among the headwinds the bank is confronting in 2014, Co-Chief Executive Officer Anshu Jain said on a conference call with analysts from Frankfurt today.
Deutsche Bank, like competitors including UBS AG, has faced probes into matters such as alleged manipulation of interest rates and currencies. At the same time, Jain, 51, said the firm is losing revenue in debt trading, a mainstay of income for investment banks, as it sheds assets to meet regulators’ stricter capital rules.
The fourth-quarter pretax loss of 1.15 billion euros ($1.56 billion) included 528 million euros in litigation-related expenses as well as costs tied to the bank’s reorganization. The average estimate of six analysts surveyed by Bloomberg was for a 628.5 million-euro pretax profit. The bank announced earnings yesterday, 10 days ahead of schedule.
“It is quite a messy result filled with legal and restructuring costs, which Deutsche would call as one-offs,” said Chad Padowitz, who oversees about $105 million in international equities as chief investment officer of Wingate Asset Management in Melbourne, Australia. “The biggest challenge for Deutsche and its European counterparts is to find avenues for growth.”
The shares of Europe’s biggest investment bank by revenue fell as much as 6 percent to 37 euros in Frankfurt, the biggest decline in 10 months. The stock has gained 1 percent over the past 12 months, lagging behind a 15 percent increase in the 44-company Bloomberg Europe Banks and Financial Services Index.
The fourth-quarter pretax loss narrowed from 3.17 billion euros in the same period of 2012, when it wrote down the value of businesses that failed to meet revenue expectations. Profit in the third quarter of last year was almost wiped out after the bank added 1.2 billion euros to its reserves for legal expenses.
“2014 will be another difficult year,” Dirk Becker, an analyst with Kepler Cheuvreux, who recommends investors buy the stock, said in an interview with Bloomberg Television in Frankfurt today. “We’ll probably see another 2 billion euros of litigation costs plus a lot of restructuring.”
The investment banking and trading unit saw its revenue slide 27 percent to 2.46 billion euros in the fourth quarter from the same period of 2012. The decline was led by a 31 percent drop in debt trading income. Revenue from trading equities rose 8 percent and that from advising clients on acquisitions and securities sales was “stable,” the bank said.
“The worry is fixed income revenues that were down,” said Christopher Wheeler, an analyst with Mediobanca SpA, who recommends investors sell the stock. “Comparing that to their U.S. counterparts who reported last week, that is much, much weaker.”
The five biggest U.S. investment banks saw their total revenue from trading fixed income, currencies and commodities, a mainstay of the business, fall 4.2 percent to $10.2 billion, data compiled by Bloomberg Industries show.
Deutsche Bank generated 15 percent of its revenue from trading debt and other products in the fourth quarter of last year compared with 27 percent in 2012.
“You will see us drop off in revenue league tables, but not materially,” Jain said. “The stats that we’re targeting most carefully is our market share in businesses that we’re committed to, which has not budged. Indeed it has even gone up.”
The U.S. will probably continue to outpace Europe in debt trading for several years “so undoubtedly we do have to look at our U.S. versus European size of platform and continue to reinvest,” Jain said.
Deutsche Bank said its transaction banking and money management units were profitable in the final three months of last year after posting losses in the fourth quarter of 2012. Pretax profit at its retail banking unit declined 24 percent from a year previously.
Moody’s Investors Service lowered its outlook on Deutsche Bank’s credit rating to negative last month, saying the company’s plan to reorient its business and boost profitability has been hampered by rising litigation-related expenses.
Jain and co-CEO Juergen Fitschen, 65, are “confident” the bank can reach profitability and capital targets they set for 2015, according to the statement published yesterday.
Deutsche Bank had 2.3 billion euros set aside for legal costs at the end of December, down from 4.1 billion euros three months earlier, after it settled three cases with regulators and clients last month.
The bank agreed to pay U.S. financing companies Fannie Mae and Freddie Mac 1.4 billion euros to settle claims that it didn’t provide adequate disclosure about mortgage-backed securities. The European Commission fined Deutsche Bank 725 million euros on Dec. 4 for its part in rigging interest rates linked to the London interbank offered rate. The company said Dec. 19 that it reached a settlement to forfeit 221 million euros to end a derivatives contract with Italian bank Banca Monte dei Paschi di Siena SpA.
“Deutsche Bank management deserves credit,” Kian Abouhossein, an analyst with JPMorgan Chase & Co. in London who has an overweight recommendation on the stock, wrote in an e-mailed report today. The firm “is still in restructuring mode but management has delivered on our wish-list of aggressive exposure reduction, bringing forward of cost savings and settlement of some litigations.”
Deutsche Bank is selling and winding down assets as regulators and investors call for banks to strengthen their finances by holding more equity.
The company had common equity Tier 1, a key measure of financial strength, of 9.7 percent of assets weighted according to risk at the end of December. Capital accounted for 3.1 percent of its balance sheet under European Union definitions, according to the statement.
Deutsche Bank expects “some volatility and potential downward pressure” on its capital ratio in the coming quarters as European regulation is harmonized, Chief Financial Officer Stefan Krause said on the analysts’ call with Jain.
A unit of the bank for selling and winding down loans and other assets saw its pretax loss narrow to 1.13 billion euros in the quarter from 1.65 billion euros a year earlier. The loss included a 197 million-euro charge related to the planned sale of its BHF-Bank unit, the company said.
The firm’s risk-weighted assets fell to 355 billion euros at the end of 2013 from 365 billion euros three months earlier. The balance sheet shrank to 1.45 trillion euros from 1.52 trillion euros under the EU standards.