Deutsche Bank Profit Beats Estimates as Overhaul Looms

Deutsche Bank AG, days after paying a record fine for rigging interest rates, posted first-quarter profit that beat analyst estimates, helped by increases in debt and equity trading that pushed revenue to a near record.

While net income fell to 544 million euros ($590 million) from 1.1 billion euros in the year-earlier period, it surpassed the 256 million-euro average estimate of four analysts surveyed by Bloomberg. Profit in the period was hurt by a 1.5 billion-euro charge for legal costs as the bank reached a settlement in the Libor probe, the lender said Sunday.

“Profit would have been an absolute record if they didn’t have litigation,” said Dirk Becker, a Frankfurt-based banks analyst at Kepler Cheuvreux. “It’s an absolutely sensational quarter.”

With profitability and capital ratios under pressure from legal costs and additional regulations, Co-Chief Executive Officers Anshu Jain and Juergen Fitschen are poised to outline their plans to reshape the bank and revive returns on Monday. Their measures include selling part of its Postbank consumer unit, shrinking the investment bank and retreating from some of the 70 countries in which the Frankfurt-based company operates.

The company was fined $2.5 billion for manipulating interest-rate benchmarks by four regulators in the U.S. and the U.K. on Thursday. The penalty is the biggest yet that Deutsche Bank has had to pay for misconduct and comes on top of the 7.1 billion euros the lender has spent on litigation in the last three years.

Capital Ratio

Deutsche Bank’s common equity Tier 1 capital ratio, a key measure of financial strength, fell to 11.1 percent from 11.7 percent. Further headwinds are expected, the bank said on Sunday. The company’s leverage ratio fell to 3.4 percent from 3.5 percent at the end of 2014.

“The biggest concern over the last years has been the regulatory pressure and the litigation issues,” said Guy de Blonay, who manages about $880 million in financial stocks at Jupiter Asset Management Ltd. in London and doesn’t hold Deutsche Bank shares. “The market is possibly underestimating the size of litigation costs going forward.”

Among the bank’s outstanding legal threats to earnings are probes into the manipulation of benchmark foreign-exchange rates, as well as investigations into mortgage- and asset-backed securities dealings and alleged U.S. sanctions violations.

Revenue Climbs

The bank still reported its second-best quarter by revenue, making 10.4 billion euros. Revenue at the investment bank climbed 15 percent to 4.65 billion euros as fixed-income sales and trading rose 9 percent and equities sales gained 31 percent from the year-earlier period. Profit at the investment bank fell 55 percent to 643 million euros because of litigation costs.

“The investment bank’s revenues were solid,” said Alevizos Alevizakos, an analyst at Keefe Bruyette & Woods in London. “Equities and investment-banking fees were particularly impressive. The fact that they controlled costs at the unit is also a positive sign for the future.”

In the U.S., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley have all reported higher revenue from increased trading in the quarter with central banks poised to take diverging actions. The Federal Reserve is expected to begin raising rates later this year after the European Central Bank started a quantitative easing program and the Swiss National Bank roiled markets by abandoning its currency peg in January. Credit Suisse Group AG, the first among Europe’s largest banks to report earnings, said an increase in trading helped to boost profit at its investment bank.

Consumer Banking

Revenue rose less than 1 percent at the consumer-banking division, while pretax profit climbed 13 percent to 536 million euros on lower costs. Pretax profit at Postbank climbed 22 percent to 207 million euros. Deutsche Bank plans to cut its stake in the lender to less than 50 percent by selling shares to the public, according to the person familiar with the matter.

The asset- and wealth-management unit posted a 75 percent increase in pretax profit to 291 million euros, and transaction banking earnings climbed 15 percent to 409 million euros.

Deutsche Bank said Friday it plans to invest in transaction banking, asset and wealth management businesses. The company plans to cut about 150 billion euros of assets that are included when calculating the lender’s leverage ratio at the investment bank, according to a person with knowledge of the matter. That equates to a cut of about 18 percent of current assets, according to JPMorgan analysts’ estimates.

Overhaul Plan

Jain and Fitschen are implementing their biggest strategic overhaul since being appointed three years ago after failing to meet their previous targets for profitability. They set a target in 2012 of boosting the company’s after-tax return on equity to at least 12 percent in 2015. The target date was postponed to 2016 after Deutsche Bank sold stock to boost capital in May. ROE stood at 3.1 percent in the first quarter.

The company hasn’t said whether it will change that target in the overhaul. Deutsche Bank has been the worst-performing stock among global investment banks under the co-CEOs’ tenure.

The shares rose 0.5 percent on Friday in Frankfurt to 31.58 euros, for a market value of 43.6 billion euros.

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