Deutsche Bank: No Nasty Surprises

Investors breathe a sigh of relief as a 47% decline in quarterly profits meets expectations and there are no huge losses related to rogue traders or subprime loans

In the banking industry these days, no news is good news. Investors are relieved just to hear that there are no unpleasant surprises. So it was with Deutsche Bank’s (DBKGN) fourth-quarter earnings report on Feb. 7. Net profit fell 47% from a year earlier, to $1.4 billion, on lower earnings at the investment banking division as well as higher personnel costs.

But the numbers were in line with expectations, and more important, there were no huge writedowns linked to turmoil in the financial markets. The bank's shares slipped 1% in Frankfurt trading on the news, less than the decline in the benchmark German DAX index. Chief Executive Josef Ackermann—celebrating his 60th birthday—looked pleased with himself at a Frankfurt press conference. "Deutsche Bank is a solid bank for all seasons," he said.

But how much was skill, and how much was luck? Ackermann says Deutsche Bank strategists last year recognized that the U.S. housing market was overheated and unwound their exposure. The Frankfurt bank couldn't avoid some losses, writing off $3.2 billion in the last quarter. And in the most recent quarter, Deutsche Bank wrote off about $74 million related to its leveraged finance business.

But those figures are modest compared with double-digit billion losses at the likes of UBS (UBS), Citigroup (C), and Merrill Lynch (MER). Without naming competitors, Ackermann criticized banks that took trading positions that, if they went sour, threatened the whole institution. "Certainly there's an element of skill" in Deutsche Bank's escape from the subprime mess, says Matthew Clark, an analyst at investment bank Keefe, Bruyette & Woods in London. "Their policy was to distribute risk, not hold risk."

Ackermann Upbeat About 2008

Ackermann was careful not to declare the danger over. After learning that trader Jérôme Kerviel may have caused $7.2 billion losses at Socíeté Générale (SOGN.PA) in Paris, Ackermann ordered an inquiry into whether Deutsche Bank would be vulnerable to an employee making unauthorized transactions. The results won't be in for several weeks. "I don't expect that something like that can happen to us," says Ackermann, though he added "I can't rule it out."

Ackermann even offered a relatively upbeat forecast for 2008. He stuck to his prediction that the bank will report a pretax profit of $12.3 billion for the year. Analyst Clark thinks Ackermann's confidence means 2008 is already off to a solid start. "If they had a terrible January and expect further writedowns, they would be unlikely to make such a bullish outlook statement," he says.

Deutsche Bank may even be able to profit from the woes of its rivals. Michael Cohrs, head of global banking, told reporters the bank can make money in areas such as distressed debt or helping companies restructure their balance sheets. Added Anshu Jain, head of global markets: "There is a clear opportunity for us to take market share."