Deutsche Bank Seen Missing Goldman-Led Gains on Cost Rise

Deutsche Bank AG will probably report a loss in the fourth quarter because of restructuring costs, missing out on a market rebound that helped profit surge at U.S. rivals such as Goldman Sachs Group Inc.

Europe’s biggest bank by assets may post a loss of 210 million euros ($282 million) compared with a profit of 147 million euros in the fourth quarter of 2011, when it reports earnings tomorrow, according to the average estimate of nine analysts surveyed by Bloomberg. Goldman Sachs and three other leading U.S. investment banks saw their combined net income jump 92 percent annually to $9.73 billion in the period.

Co-Chief Executive Officers Juergen Fitschen and Anshu Jain are eliminating staff and bolstering capital levels, the lowest among Europe’s biggest investment banks, in their first year in charge to help meet stricter capital rules. The costs countered a surge in trading revenue, spurred by the European Central Bank’s measures to stem Europe’s sovereign debt crisis.

“Deutsche Bank is trying to look forward and hoping no one can really blame fourth-quarter losses on the new management as they only took over mid-year,” Andreas Plaesier, an M.M. Warburg analyst who recommends investors buy the shares, said by telephone from Hamburg. “It would rather see its earnings wrecked in one quarter and show it’s making progress on building capital.”

Capital Target

Jain, 50, the former head of the investment banking arm, and Fitschen, 64, who has spent his career working with corporate clients, succeeded Josef Ackermann in June.

The co-CEOs pledged to increase Deutsche Bank’s core Tier 1 capital ratio under stricter Basel III rules to 7.2 percent by the end of last year and to more than 10 percent by the end of 2015. Its biggest competitors will reach similar levels months or years sooner, according to forecasts from the banks.

Current Basel 2.5 rules, a less stringent measure of financial strength, put Deutsche Bank’s core Tier 1 ratio at 10.7 percent in the third quarter. UBS AG scored 18.1 percent, Credit Suisse Group AG 14.7 percent and Barclays Plc 11.2 percent, data compiled by Bloomberg Industries show.

Jain and Fitschen are reducing pay, eliminating almost 2,000 jobs and have combined Deutsche Bank’s asset and wealth management divisions to help lift after-tax return on equity, a measure of profitability, to more than 12 percent by 2015 from 8 percent in 2011.

Chief Financial Officer Stefan Krause said last month that asset wind-downs, impairments on goodwill and other effects may have a “significant negative impact” on the bank’s fourth-quarter earnings.

Legal Costs

As well as raising capital and restructuring, Jain and Fitschen are contending with litigation and regulatory probes stretching from potential rigging of interbank lending rates to allegations the bank mis-sold products related to U.S. mortgages.

Deutsche Bank may have to bear more costs from litigation this year after paying an estimated 2.3 billion euros in the past three years, analysts including Amit Goel at Credit Suisse in London wrote in an e-mailed report to clients yesterday.

“Litigation risk in particular never seems far away,” said Goel, who has an underperform recommendation on the stock.

Deutsche Bank’s shares have lagged behind rivals, climbing 16 percent over the past year compared with an increase of 24 percent for the benchmark Stoxx 600 Banks Index. The bank’s price-to-book value is 0.6, lower than the 0.8 average of the 46-member gauge. The stock rose 1.4 percent to 37.42 euros as of 11:53 a.m. in Frankfurt today.

Bond Leader

The company, which overtook Barclays as the biggest bond trader last year, according to Greenwich Associates, probably saw income there surge.

Revenue from trading in debt may have increased an annual 58 percent in the fourth quarter to 1.99 billion euros, according to the average estimate of six analysts.

“Investment banking is likely to have benefited from a stronger issue and trading volume in the fixed income business,” Christoph Bast, a DZ Bank AG analyst who recommends investors buy the shares, wrote in a Jan. 21 report to clients.

Revenue from trading fixed income, currencies and commodities at the four largest U.S. investment banks climbed a combined 39 percent annually to $8.82 billion in the three months to December, data compiled by Bloomberg Industries show. Investment banking fees across all products rose 51 percent, according to the data.

Asset Disposal

Deutsche Bank had a 10.7 percent share of fixed income trading volumes last year, the most globally, Greenwich Associates said in a Jan. 14 study. Barclays had the second-biggest share with 9.8 percent, JPMorgan Chase & Co. was third with 8.8 percent and Citigroup fourth with 8.1 percent, according to the study.

“The biggest drag for the bank is their low capital position compared to peers,” Christian Hamann, an analyst with Hamburger Sparkasse who recommends selling the shares, said by phone.

Deutsche Bank may have exceeded the year-end goal for its core Tier 1 capital ratio after making use of the fourth-quarter rally in global markets to dispose of more assets than anticipated, said Warburg’s Plaesier and Hamann of Hamburger Sparkasse.

Jain and Fitschen formed a unit last year to wind down and sell 125 billion euros of assets from loans and securitized products to a Las Vegas casino to release capital, company filings show.

Radical Steps

“The market will look at the capital situation very closely,” Philipp Haessler, an analyst at Equinet AG who recommends buying the stock, said by phone. “I expect Deutsche Bank to fulfill core tier 1 capital expectations.”

UBS, Switzerland’s largest bank, has taken more radical steps to raise capital levels by opting last year to exit most of its fixed income business. Credit Suisse, the second-largest Swiss bank, is partially diluting shareholders by issuing equity. Jain has said he wants to raise capital without selling shares.

“They told us that their capital is going to be 7.2 percent at the end of the year and as long as that does not change, I don’t really care what happens in the quarter,” said Andrew Stimpson, a banking analyst at Keefe, Bruyette & Woods Ltd. who has a market perform rating on the shares. “We already have the profit warning, we already have the bad news.”

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