Deutsche Bank Swings to Profit -- 5th Update
October 27 2016 - 5:06AM
Dow Jones News
By Jenny Strasburg
Deutsche Bank AG on Thursday posted an unexpected profit and set
aside more cash to cover litigation costs amid talks aimed at
settling mortgage-securities probes with U.S. authorities.
Third-quarter net income was EUR278 million ($303.1 million),
beating analysts' average expectations for a net loss of around
EUR610 million. That compared with a net loss of EUR6 billion
during the same period last year, driven by billions of dollars in
write-downs as part of a companywide restructuring.
The bank's restructuring and litigation costs for the third
quarter were lower than analysts had expected. Revenue from
trading, especially in credit, were stronger than a year ago,
offsetting weakness in equities trading within the lender's
important global markets business.
The German lender earmarked an additional EUR501 million in the
third quarter for litigation costs and said it is "working hard" to
reach a mortgage-probe settlement with the U.S. Justice Department
and that talks are ongoing. Looming anticipated settlements with
the Justice Department, which are expected to total billions of
dollars, have weighed on Deutsche Bank's shares and fueled concerns
about whether it has adequate capital to cover potential losses and
meet regulatory requirements.
The Wall Street Journal reported Sept. 15 that the Justice
Department initially proposed the bank pay $14 billion to close out
mortgage-securities investigations. Deutsche Bank said in response
that it didn't intend to pay "anywhere near" that amount, which was
much higher than investors or the bank expected.
The disclosure of the government's opening bid nonetheless
rattled Deutsche Bank clients, and markets. Some clients curtailed
their business with Deutsche Bank over the course of several weeks,
including by pulling deposits, executives said Thursday.
Since early October, the situation "has stabilized," Marcus
Schenck, Deutsche Bank's finance chief, told analysts on a call
Thursday morning.
As of Sept. 30, the lender had a total of EUR5.9 billion in
litigation reserves to cover a wide range of anticipated legal
expenses, including the expected U.S. mortgage settlement. That was
an increase from EUR5.5 billion in litigation reserves as of June
30.
Shares in the bank were up 0.71% Thursday morning.
In results released before the market opened, Deutsche Bank said
third-quarter net revenue was EUR7.5 billion, a 2% increase from
the same period a year earlier and better than analysts' average
estimates.
Deutsche Bank's global markets business had a 10% net revenue
increase in the quarter, driven largely by strong credit and rates
trading. Low interest rates hurt the lender's global transaction
banking revenue, which was down 5%. Its overall investment-banking
revenue declined slightly, but Deutsche Bank said it gained back
strength in its core deal-advisory business, including advising
companies on stock offerings.
Deutsche Bank's Tier 1 capital ratio, a measure of financial
strength, increased to 11.1% from 10.8% in the second quarter. The
lender is working to boost that ratio to at least 12.5% by
2018.
Deutsche Bank's shares have fallen 41% this year, more than
twice the decline of the Stoxx Europe 600 Banks index.
Despite harsher economic conditions and challenges specific to
Deutsche Bank, including its legal woes, executives said Thursday
they're sticking to multiyear financial targets they set in late
2015. The lender has ramped up cost-cutting plans, and is still
planning to get rid of its burdensome German retail-banking unit
called Postbank, eventually, executives said.
A review of the bank's asset-management business is ongoing,
Chief Executive John Cryan said Thursday. Executives have looked at
selling all or part of the business, people familiar with the
matter previously said, but executives haven't made details of
those discussions public. Mr. Cryan on Thursday called asset
management "an integral part of the group," but also said that the
business's new head, Nicolas Moreau, is reviewing capital
allocation and other elements of strategy and will report back on
his recommendations. Mr. Cryan didn't give a timeline for the
review.
Last year's big third-quarter loss was driven by write-downs of
the value of investment-banking and other assets. The period marked
the start of a multiyear cost-cutting and turnaround plan under
then-new CEO Cryan.
Deutsche Bank's earnings since have been hurt by low and
negative interest rates that eat into retail-banking margins, and
broad economic concerns have curtailed deal-making revenue. Some
hedge-fund and other clients have tapered their trading and
financing relationships with Deutsche Bank during recent months,
when concerns about the lender's capital intensified, The Journal
and others reported last month.
Write to Jenny Strasburg at jenny.strasburg@wsj.com
(END) Dow Jones Newswires
October 27, 2016 04:51 ET (08:51 GMT)
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