Deutsche Bank AG, Germany’s largest bank, reported worse than expected fourth quarter results Jan. 31. The reasons for the $3.5 billion pre-tax loss were extraordinarily large write-downs and provisions for legal expenses.
“Our reported results reflect a number of decisions we took in the fourth quarter. We have clearly communicated our commitment to taking determined but tough decisions, in order to deal with past issues head-on, and prepare Deutsche Bank for the future,” said Co-CEO Anshu Jain.
Given several scandals and a plan to reshape the bank until 2015, it is likely that the management decided to “kitchen sink” the fourth quarter of 2012 to start with a clean sheet in 2013. The Co-CEOs Jürgen Fitschen and Anshu Jain took over from previous CEO Josef Ackermann last summer and were soon facing an uphill battle.
We … set Deutsche Bank on course for fundamental cultural change.
—Deutsche Bank Co-CEO Jürgen Fitschen
Deutsche is one of the banks charged with manipulating the Libor interest rate. A settlement with financial regulators in the U.S. and the U.K. is still outstanding and will cost hundreds of millions. In addition, the Federal Housing Finance Agency levied a charge against the bank for fraudulent dealing with mortgage-backed securities, resulting in billions in damages.
To round off the U.S. charges against the bank, prosecutors in New York and Washington are investigating to see whether the bank made illegal deals with blacklisted countries like Sudan and Iran. To provision for the costs of litigation and eventual settlement, the bank set aside $1.8 billion in 2012.
This number is likely to rise over 2013, as we get a clearer picture of settlements and a final court ruling. Out of the $1.8 billion, $1.36 billion was provisioned in the fourth quarter alone because the company lost another trial in Germany in December. Heirs of the deceased German businessman Leo Kirch accused the bank of deliberately contributing to the bankruptcy of Kirch’s business. This claim could also reach into the billions of dollars.
Large Impairments of Non-Core Assets
Given the unpredictability of the legal claims and the resulting high provisions taken against earnings, traders were largely disappointed. “The numbers are much worse than expected, mainly due to the high write-downs and provisions,” one trader told the German press.
The bank also took write-downs of assets that don’t belong to core operations. It also wrote down assets of previous acquisitions and investments at the core bank, with both operations totaling $3.5 billion. This ate up the pre-tax profit of $1.36 billion that the core bank was generating, where business was altogether okay.
“Underlying earnings in the core operating divisions are moving in the right direction with the key exception of Asset & Wealth Management,” wrote Barclays in a note.
Deleveraging Boosts Capital
Despite the large extraordinary items and the loss, shares rose 2.4 percent in Frankfurt trading to close at 37.99 euro ($51.90) Jan. 31, and then rose another 1.5 percent the following day.
“The most important news of the day is that there won’t be any capital raising,” Guido Hoymann, analyst at Metzler Bank told German online portal Der Spiegel. In fact, the bank managed to boost its capital ratio without issuing any new shares. It did so by selling $38 billion in assets and hedging other positions to reduce capital exposure, a process called deleveraging. Its Tier 1 equity capital ratio (a ratio most looked at by regulators and analysts) is now at 8 percent of risk-weighted assets, roughly equivalent to global peers.
Deutsche also made progress in achieving its cost cutting target of $6.1 billion per year by 2015. It froze the pay of 25,000 employees in Germany and reduced its bonus pool to 9 percent of revenues. Out of the targeted 1600 redundancies in the investment banking division, 1350 have been completed. Six hundred people were let go in the investment management division.
“This is the most comprehensive reconfiguration of Deutsche Bank in recent times. We reconfigured our divisional structure, launched our most ambitious cost control program ever, and set Deutsche Bank on course for fundamental cultural change,” said Jürgen Fitschen.
The stock market seems to give the new management credit. Shares have done extraordinarily well since the bottom in July of 2012. They are up 53 percent compared to 17 percent for the German blue chip index DAX.
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