Tags: Deutsche Bank | Earnings | Loss | Legal Expenses

Deutsche Bank Swings to Third-Quarter Loss on Legal Expenses

Wednesday, 29 October 2014 08:51 AM

Deutsche Bank AG, Germany’s biggest lender, swung to a loss in the third quarter after setting aside 894 million euros ($1.1 billion) to cover the costs of settling investigations of past wrongdoing.

The net loss in the three months through September was 94 million euros compared with net income of 41 million euros a year earlier, the Frankfurt-based company said. The bank reported higher-than-estimated revenue from trading fixed income and currencies, its biggest sales generator.

Deutsche Bank, facing mounting legal costs and probes, yesterday named Goldman Sachs Group Inc.’s Marcus Schenck to succeed Stefan Krause as chief financial officer in May. The firm is among institutions accused of attempting to manipulate currency markets and said today that it is in talks with authorities to resolve its role in the industry-wide rigging of benchmark interest rates. It is also under investigation for doing business with countries subject to U.S. sanctions, including Iran.

“They did OK on an operating level, but I’m concerned about costs,” Christian Hamann, an analyst with Hamburger Sparkasse said by phone. “They’re going to face ongoing legal expenses for a while longer.”

The shares fell 1.8 percent to 24.78 euros as of 12:31 p.m. in Frankfurt, extending their decline this year to about 28 percent. The Stoxx Europe 600 Banks Index, which tracks 49 companies, fell 0.9 percent Wednesday.

Management Revamp

The costs of resolving accusations of wrongdoing have eroded the company’s ability to build capital to meet looming regulatory requirements and pushed co-Chief Executive Officers Anshu Jain and Juergen Fitschen to sell 8.5 billion euros of stock earlier this year.

As part of the management overhaul, Schenck, a Goldman Sachs partner and former CFO of German utility E.ON SE, will replace Krause after the annual general meeting next year. Krause will assume a new position overseeing strategy as Deutsche Bank adapts to changing regulatory requirements. Christian Sewing, Deutsche Bank’s head of group audit, will join the firm’s management board in a new role.

“Management changes of this type in general raise concern about a company’s long-term strategy,” said Peter Braendle, who managers about 500 million euros in European equities at Swisscanto Asset Management AG in Zurich.

Jain is betting the firm can grab market share in fixed income as some competitors retreat.

Debt Beat

Revenue from trading fixed income and currencies rose 15 percent to 1.44 billion euros in the third quarter from a year earlier, the company said. That beat the 1.39 billion euro average of five analysts estimates compiled by Bloomberg News. The debt business accounted for 21 percent of Deutsche Bank’s 31.9 billion euros in revenue last year.

The five biggest U.S. securities firms saw their combined revenue from trading fixed income, currencies and commodities rise 14 percent in the third quarter from a year earlier, data compiled by Bloomberg Intelligence show.

Pretax profit at Deutsche Bank’s investment bank rose 4 percent to 374 million euros in the quarter from a year earlier while earnings at its consumer and corporate banking unit gained 3 percent to 356 million euros and rose 2 percent to 288 million euros at the asset and wealth management division. Pretax profit from the transaction banking business declined 11 percent to 338 million euros over the period while the loss at the company’s unit for winding down unwanted assets narrowed to 1.05 billion euros from 1.2 billion euros, according to the company’s filings.

“Near-term headwinds persist,” Jain and Fitschen said in a statement. “Europe’s macro-economic outlook faces challenges, and geopolitical risks continue to create uncertainties.”

Stress Test

Deutsche Bank’s legal costs in the quarter compare with 1.16 billion euros in the same period last year. In 2013, it racked up 3 billion euros in litigation expenses, in part for a 1.4 billion-euro settlement over claims it didn’t provide adequate disclosure about the risks of mortgage-backed securities sold to government-backed lenders Fannie Mae and Freddie Mac during the U.S. housing boom.

“The idea that they’re making progress is more important for me” than the size of the legal charge, said Neil Smith, an analyst at Bankhaus Lampe in Dusseldorf. “I expect there to be another big quarter or two of litigation provisions in the future.”

Deutsche Bank is one of 105 banks that passed the European Central Bank’s yearlong probe of lender balance sheets and its economic survival tests. The company still faces rules that will require banks to sell more debt that can be written off in a crisis. The German lender is also under pressure from some investors to increase capital as a share of total assets.

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Deutsche Bank AG, Germany's biggest lender, swung to a loss in the third quarter after setting aside 894 million euros ($1.1 billion) to cover the costs of settling investigations of past wrongdoing.
Deutsche Bank, Earnings, Loss, Legal Expenses
Wednesday, 29 October 2014 08:51 AM
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