Deutsche Bank Gets Boost From Underwriting as Profit Seen Rising

Deutsche Bank AG, continental Europe’s biggest lender, may say second-quarter profit climbed after earnings from underwriting stock and bond sales helped bring a surge in investment banking revenue.

Net income may increase 29 percent to 845 million euros ($1.12 billion) in the three months through June from 656 million euros a year earlier, according to the average estimate of nine analysts surveyed by Bloomberg. Deutsche Bank may say pretax profit at the investment bank doubled to 990 million euros when it reports the earnings on July 30.

Global investment banks, including Morgan Stanley and Goldman Sachs Group Inc., had higher revenue from trading and underwriting securities for clients in the second quarter. Deutsche Bank Co-Chief Executive Officer Anshu Jain, 50, is also cutting pay, shedding riskier assets and moving staff to cheaper locations to reduce costs.

“The market is expecting to see a good quarter in investment banking,” Ingo Frommen, an analyst with Landesbank Baden-Wuerttemberg in Stuttgart who recommends investors buy the stock, said in a telephone interview yesterday. “There is positive momentum on costs, but I don’t know if we’ll see the full effect as they still have to spend money on their overhaul and then there’s the black box of litigation.”

Apple Bonds

Deutsche Bank and Goldman Sachs were among banks earning $53.25 million in fees from underwriting a $17 billion bond sale by Apple Inc. Deutsche Bank was joint global coordinator with Morgan Stanley on the sale of 1.4 billion euros of shares in broadcaster RTL Group SA by Bertelsmann SE, Europe’s largest media company, at the end of April.

Jain, formerly head of the investment bank, has set aside 2.4 billion euros to cover expenses from litigation and regulatory probes including an investigation into alleged manipulation of Libor, a global benchmark for interest rates.

Net income at Deutsche Bank rose 19 percent to 1.65 billion euros in the first quarter, traditionally a peak period for investment banking as clients do new business at the start of the year.

Deutsche Bank rose 0.5 percent to 36.22 euros a 11:06 a.m. in Frankfurt, valuing the company at 36.9 billion euros. The shares have risen 9.9 percent this year compared with a 9.4 percent increase for the 40-member Bloomberg Europe Banks and Financial Services Index.

Revenue was “sound” in the first two months of the second quarter, helped by “solid” income at the investment bank, Jain said in June. Low interest rates and pressure on margins in some regions and businesses put a drag on earnings, he told investors at a conference in New York.

Transaction Banking

Revenue from fixed income, currencies and commodities was 9.2 billion euros last year, 59 percent of the 15.6 billion euros in income at the investment bank unit, according to company filings. The investment bank contributed 46 percent of the firm’s 33.7 billion euros of revenue.

Deutsche Bank’s three non-investment banking businesses also helped earnings grow, the survey showed.

Pretax profit at the transaction banking division probably rose 9.1 percent to 321 million euros, according to the average estimate of seven analysts. Asset and wealth management saw a 49 percent increase to 146 million euros and private and corporate banking raised pretax profit 9.5 percent to 402 million euros, the analysts said.

Lower Expenses

Cost-cutting is also helping boost profit. In September, Deutsche Bank announced a plan to reduce annual expenses by 4.5 billion euros by 2015. It completed the majority of almost 2,000 job cuts, including more than 800 at the investment-banking unit, by the end of last year.

The company started moving 1,500 positions out of New York, London, Hong Kong and Singapore in the first quarter, Chief Operating Officer Henry Ritchotte said in a presentation to investors in Brussels last month. The bank hasn’t specified where the jobs are being moved to.

Jain and Chief Financial Officer Stefan Krause are scheduled to hold a conference call with analysts at 8 a.m. Frankfurt time after the publication of the quarterly results.

Investors will probably ask Jain about plans to reduce leverage at the bank toward levels recommended by the Basel Committee on Banking Supervision, said Andreas Plaesier, an analyst at M.M. Warburg in Hamburg who recommends investors buy Deutsche Bank shares.

Leverage Concern

Some regulators are questioning the weightings banks use to determine their risk and capital levels and are instead embracing a broader measure of equity to total assets known as the leverage ratio. The Basel committee, which sets global banking standards, has suggested that banks hold capital equivalent to 3 percent or more of their assets.

Deutsche Bank had a leverage ratio of 2 percent after selling almost 3 billion euros of shares at the end of April, James Chappell, an analyst at Berenberg Bank in London, said in an e-mailed report to clients last month. The company would have to delay dividends and set aside four years of profit to exceed the 3 percent goal, according to Berenberg.

The following is a table of average second-quarter estimates, year-earlier figures and results from the previous quarter, as well as the number of analysts surveyed. The data is in millions of euros.

                           Q2 2013   Q2 2012   Q1 2013    Number
                          Expected  Reported  Reported  Analysts
Revenue before loan
loss provisions              8,311     8,020     9,391         9
Net interest income
before loan-loss provisions  3,819     3,912     3,650         6
Loan-loss provisions           364       418       354         8
Fee and commission income    2,817     2,770     2,849         6
Non-interest expenses        6,751     6,635     6,623         5
Pretax profit                1,219       967     2,414         9
Net income/(loss)              845       656     1,651         9
Common equity Tier 1 ratio
under full Basel III rules   9.76%       N.A.     8.8%         7

                           Q2 2013   Q2 2012   Q1 2013    Number
                          Expected  Reported  Reported  Analysts
Corporate Banking & Securities
Sales & trad., equity rev.     679       507       766         7
Sales & trad., debt and
other products revenue       2,120     2,132     2,727         8
Origination, equity rev.       134        89       152         5
Origination, debt rev.         368       284       455         5
Advisory rev.                  104       136        69         5
Loan products rev.             302       241       296         5
Total revenue                3,704     3,397     4,604         5
Non-interest costs           2,670     2,890     2,695         3
Pretax profit                  990       496     1,852         7

                           Q2 2013   Q2 2012   Q1 2013    Number
                          Expected  Reported  Reported  Analysts
Global Transaction Banking:
Pretax profit                  321       294       309         7
Private & Business Clients:
Pretax profit                  402       367       482         7
Asset & Wealth Management:
Pretax profit                  146        98       221         7
Non-Core Operations Unit:
Pretax (loss)                 (505)     (216)     (196)        7
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