July 29 (Bloomberg) -- Deutsche Bank AG, Europe’s biggest investment bank, surprised analysts by reporting revenue from debt trading that beat four out of five U.S. peers and helped boost pretax profit 16 percent.
Income from trading debt and currencies was 1.83 billion euros ($2.5 billion) in the second quarter, little changed from a year earlier and exceeding the 1.63 billion-euro average estimate of eight analysts. The five biggest U.S. banks saw their combined revenue from trading fixed income, currencies and commodities fall 9.4 percent to $12.1 billion in the period, data compiled by Bloomberg Intelligence show.
Deutsche Bank, which competes with firms including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp in the bond market, is spending some proceeds from an 8.5 billion-euro share sale to expand in fixed income’s most profitable businesses. Banks across the globe are seeking ways to boost revenue amid tougher regulation and as record low interest rates pare returns from lending.
“The results demonstrate the resilience of the investment bank franchise as well as continued cost control, although litigation and regulatory issues continue to take the ‘shine’ away,” Citigroup Inc. analysts including Kinner Lakhani said in an e-mailed report from London today. They recommend investors buy the shares.
Fixed-income trading revenue at JPMorgan fell 15 percent in the second quarter to $3.5 billion. Revenue from equities and fixed-income at Citigroup also slid 15 percent. Bank of America saw its revenue from trading debt, currencies and commodities rise 5.1 percent, while it declined at Goldman Sachs Group Inc.
Profit before tax climbed to 917 million euros, led by the investment bank, compared with an estimate of 702 million euros. Pretax profit for investment banking and trading increased by 17 percent to 885 million euros. That beat the 703 million-euro average estimate of six analysts surveyed by Bloomberg.
Deutsche Bank fell 0.1 percent to 26.66 euros at 11:40 a.m. in Frankfurt, extending this year’s decline to 19 percent, the fourth-biggest drop among 43 companies listed on the Bloomberg Europe Banks and Financial Services Index, which rose 0.3 percent.
The investment banking unit won market share in areas that require less capital and Deutsche Bank hasn’t “materially” changed plans for allocating funds to its debt trading arm since the share sale, co-Chief Executive Officer Anshu Jain said today.
“We’ve seen market share gains in corporate finance, in mergers and acquisitions, in debt capital markets, none of which would have much to do with balance sheet areas,” Jain said on a conference call with analysts.
Costs, excluding interest payments, dropped 4 percent to 6.69 billion euros as the legal expenses shrunk 25 percent to 470 million euros and staff compensation decreased 7 percent to 3 billion euros.
“Costs were under control, so I think we’re beginning to see the benefits of some of the cost savings starting to come through,” Neil Smith, an analyst with Bankhaus Lampe in Dusseldorf who recommends investors hold the shares, said by telephone.
A 49 percent increase in tax payments led to a drop in second-quarter net income, which fell 29 percent to 237 million euros. That missed the 470 million-euro average estimate of eight analysts surveyed by Bloomberg.
Deutsche Bank’s debt business accounted for 23 percent of total revenue of 7.86 billion euros in the second quarter. That compared with 21 percent of 31.9 billion euros in revenue reported last year.
In Europe, Credit Suisse Group AG last week posted higher-than-forecast second-quarter profit at its investment bank, benefiting from a 14 percent increase in fixed-income revenue.
Investor concerns about the erosion of the debt business at Deutsche Bank “should now be alleviated given consecutive solid quarters,” Omar Fall, an analyst at Jefferies International, wrote in an e-mailed report from London today.
Deutsche Bank’s revenue from debt trading had dropped 10 percent in the first quarter from a year earlier, less than the 16 percent decline for the combined revenue from that business of nine global banks tracked by Bloomberg Intelligence.
The bank’s common equity Tier 1 ratio, a key measure of financial strength, rose to 11.5 percent at the end of June, helped by revenue from the sale of stock. It stood at 9.5 percent on March 31, the lowest level of all but one of 17 global banks tracked by Bloomberg Intelligence. Royal Bank of Scotland Group Plc posted the lowest figure.
Deutsche Bank sold 299.8 million shares at 22.50 euros a piece in last month’s share sale, after raising 1.75 billion euros in May selling stock to an investment vehicle of Qatar’s former prime minister, Sheikh Hamad bin Jassim bin Jabr Al Thani. It had also sold almost 3 billion euros of shares in April last year to raise capital levels.
Reserves for litigation expenses rose 450 million euros from the first quarter to 2.2 billion euros. The bank said litigation costs for the rest of the year were “unpredictable.”
Regulators have requested information on Deutsche Bank’s activities in high-frequency trading and it’s also a defendant in class action complaints alleging violations of U.S. securities laws in that area, the company said today.
Contingent liabilities rose to 3.2 billion euros from 2 billion euros over the period to reflect potential costs from regulatory investigations, the company said.
Legal costs, which totaled 3 billion euros last year, are hampering efforts to build capital and increase returns for investors. Deutsche Bank has yet to resolve probes into its role in industrywide attempts to manipulate benchmark interest rates and currency markets and faces lawsuits which allege it didn’t make adequate disclosure of U.S. mortgage-backed securities.
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