Deutsche Bank Profit Beats Estimates on Trading Revenue

Deutsche Bank AG, Europe’s largest investment bank, reported profit that fell less than analysts estimated after trading revenue beat projections. The shares climbed.

Net income dropped 34 percent to 1.08 billion euros ($1.5 billion) in the first quarter from a year earlier, the Frankfurt-based company said in a statement on its website today. That compared with the 1.01 billion-euro average of 10 analyst estimates compiled by Bloomberg.

Revenue from a unit trading fixed income and currencies decreased 10 percent to 2.43 billion euros, exceeding the 2.12-billion euro average of nine analysts’ estimates. The decline was 16 percent including commodities trading, which was split off from the unit, Deutsche Bank said.

Deutsche Bank has faced calls from investors to raise capital by selling shares after uncertainty over monetary policy and the Ukraine crisis brought a slide in trading revenue as clients shied away from markets. Tighter regulation and a smaller balance sheet have also squeezed revenue.

“The results were quite positive,” Steven Gould, an analyst at Natixis Securities in Paris, said by telephone. “The capital situation is less of a worry than people were anticipating.”

The company also said it didn’t add to 1.8 billion euros set aside for litigation costs in the first quarter, bolstering the profit figure. Deutsche Bank increased its contingent legal liabilities, which don’t affect profit, 33 percent to 2 billion euros in the period due to developments in regulatory probes.

Shares Surge

Deutsche Bank’s shares rose as much as 3.3 percent in Frankfurt, the biggest gain since Jan. 13. They closed up 2.2 percent at 32.11 euros, narrowing a decline this year to 7.4 percent. The 43-member Bloomberg Europe Banks & Financial Services Index rose 2.1 percent today.

The company said after markets closed yesterday that it will sell at least 1.5 billion euros in subordinated debt to help raise capital levels and meet stricter limits on leverage.

Deutsche Bank doesn’t rule out selling shares to raise capital, co-Chief Executive Officer Anshu Jain told analysts on a conference call. More capital is good for banks, he said. The bank owes it to shareholders to exhaust other options first, Chief Financial Officer Stefan Krause said on the same call.

Losses in the unit winding down assets not deemed central to Deutsche Bank’s business more than doubled to 532 million euros in the first quarter from 258 million euros a year earlier. Analysts had expected a loss of 474 million euros.

Capital Strength

The company’s common equity Tier 1 capital ratio under Basel III rules, a key measure of financial strength, fell to 9.5 percent from 9.7 percent at the end of December, it said in the statement. The ratio decreased as the bank assigned more risk to some assets and pursued “targeted growth,” Deutsche Bank said.

The bank finished last year holding less capital than all but two of the nine biggest European and U.S. investment banks, data compiled by Bloomberg Industries show. JPMorgan Chase & Co. and Barclays Plc had lower levels.

“The investment bank hasn’t done so well with revenue under pressure as the bank sheds assets and clients hold off trades,” Dirk Becker, an analyst with Kepler Cheuvreux, who recommends investors buy the shares, said by phone from Frankfurt. “All eyes are on Deutsche Bank’s capital levels. The exciting question is how far new rules will cut them and what the effect of shedding assets has been.”

Trading Book

The European Banking Authority’s proposed changes to how banks value trading book assets at the end of March could lower capital levels by 1.5 billion euros to 2 billion euros, the company said today.

That’s less than the 2.2 billion-euro reduction by the second or third quarter anticipated by Kian Abouhossein, an analyst for JPMorgan. He cut his recommendation on the stock to neutral from overweight in an e-mailed report from London this month.

Jain and co-CEO Juergen Fitschen are shrinking assets to build capital levels after they raised almost 3 billion euros by selling shares at 32.90 euros apiece in April last year. They’re aiming to cut Deutsche Bank’s balance sheet by 250 billion euros, or 16 percent, from last June through 2015. Deutsche Bank is willing to lose revenue in some businesses because of the plan, Jain said in January.

The five biggest U.S. investment banks saw their combined revenue from trading fixed income, commodities and currencies fall 13 percent to $15 billion in the first three months from the same period in 2013, data compiled by Bloomberg Industries show. Deutsche Bank relied on that business for 22 percent of its income last year, filings show.

Sale Speculation

Jain and Fitschen are considering selling about 5 billion euros of shares to investors to increase capital, Germany’s Handelsblatt newspaper reported last week, citing unidentified people in the finance industry. Deutsche Bank wants to catch up with the capital ratios of its competitors while complying with new regulations, Handelsblatt said.

Deutsche Bank needs to tap shareholders for about 10 billion euros, analysts at Mediobanca SpA said in an e-mailed report from London last week. That would allow the bank to avoid losing debt-trading market share while meeting new standards for valuing complex assets and cover regulatory fines and legal settlements, they said.

The company’s legal costs, which totaled 3 billion euros last year, are hampering efforts to build capital. Deutsche Bank has yet to resolve probes into its role in industry-wide attempts to manipulate benchmark interest rates and currency markets and faces lawsuits alleging the company failed to adequately disclose U.S. mortgage-backed securities.

The lender had posted a surprise loss of 1.36 billion euros in the fourth quarter as it set aside 528 million euros for legal costs in addition to expenses to settle a lawsuit related to the collapse of a group of German media companies. There will be significant litigation costs in the coming quarters, Krause said.

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