Lower-than-expected legal, restructuring costs are recorded;
troubles aren't over
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 ($303.3 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, in part because
employee compensation dropped. Revenue from trading, especially in
credit and interest-rate products, was stronger than a year
earlier, offsetting weakness in equities trading within the
lender's important global markets business.
Deutsche Bank shares gained 0.6% Thursday after the
announcement.
Meaningful concerns remain about Deutsche Bank's ability to pay
big legal fines, cut costs and stabilize profits without selling
shares or taking other painful capital-raising steps, analysts
said. Also, they noted that the bank's funding costs have gone up,
threatening to crimp trading and investment-banking revenue.
Deutsche Bank also didn't benefit as much as big U.S. banks did
in the third quarter from a boost in bond trading, which
disproportionately benefited players more concentrated in the U.S.
market.
The German lender earmarked an additional EUR501 million in the
third quarter for litigation costs. The bank is "working hard" to
reach a mortgage-probe settlement with the U.S. Justice Department,
the bank said. Talks are continuing and are "constructive," it
said.
Looming anticipated settlements with the Justice Department,
which could amount to 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 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.
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, currency
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 deals business, including
advising companies on stock offerings.
Deutsche Bank's common equity 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 are sticking to multiyear financial targets they set in late
2015. The lender has ramped up cost-cutting plans, and is still
planning to dispose of its burdensome German retail-banking unit
called Postbank, executives said.
A review of the bank's asset-management business is under way,
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 say how long the review would
take.
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 Mr. Cryan.
Deutsche Bank's earnings since have been under pressure from low
interest rates that squeeze retail-banking margins, while 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 Wall
Street Journal and others reported last month.
Mr. Cryan said a "personal rule" dictates that he spend at least
an hour a day with clients. Lately, he said, executives have spent
more of their time dispelling what he called "the more lurid of the
myths" about Deutsche Bank.
Questions about whether the bank has enough ready cash to meet
obligations and needs of clients were especially distracting in
September and October, Mr. Schenck said Thursday. Deutsche Bank
ended the third quarter with EUR200 billion of liquidity reserves,
compared with EUR223 billion at the end of June.
Analysts said the liquidity position is still strong, and not a
central concern.
Write to Jenny Strasburg at jenny.strasburg@wsj.com
(END) Dow Jones Newswires
October 28, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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