Deutsche Bank AG (DBK), Europe’s biggest investment bank by revenue, reported a surprise fourth-quarter loss, hurt by legal costs and accounting charges. The shares fell as much as 5.3 percent.
The pretax loss was 1.15 billion euros ($1.56 billion), on 528 million euros in litigation-related expenses as well as costs tied to its reorganization and charges to adjust credit, debt and funding valuations, the Frankfurt-based firm said yesterday in a statement. The average estimate of six analysts surveyed by Bloomberg was for a 628.5 million-euro pretax profit. The bank announced results 10 days ahead of schedule.
Deutsche Bank paid in the fourth quarter to settle a lawsuit alleging it deceived clients about products linked to U.S. mortgages and a probe into traders colluding to rig benchmark interest rates. The firm is spending money to improve controls, reduce headcount and move staff to cheaper locations as part of a plan to increase profitability.
“It is quite a messy result filled with legal and restructuring costs, which Deutsche would call as one-offs,” said Chad Padowitz, who oversees about $105 million in international equities as chief investment officer of Melbourne-based Wingate Asset Management. “The biggest challenge for Deutsche and its European counterparts is to find avenues for growth.”
Deutsche Bank Co-Chief Executive Officers Anshu Jain and Juergen Fitschen said in the statement they are “confident” the bank can reach targets they set for 2015.
Last year “was the second successive year in which we have invested in the bank’s future growth and in further strengthening our controls while addressing legacy issues,” Jain, 51, and Fitschen, 65, said. “We expect 2014 to be a year of further challenges and disciplined implementation.”
Deutsche Bank fell 4.5 percent to 37.58 euros as of 9:04 a.m. in Frankfurt. The stock has gained 2.6 percent over the past 12 months, lagging behind a 16 percent increase in the 44-company Bloomberg Europe Banks and Financial Services Index.
The bank reported a 3.17 billion-euro pretax loss for the fourth quarter of 2012 after writing down the value of businesses that failed to meet its revenue expectations, according to company filings. The firm’s profit in the third quarter of 2013 was almost wiped out after it added 1.2 billion euros to its reserves for legal expenses, the filings show.
“The management needs to show stability in the loan book, improve trading and investment banking income and produce clean numbers for the stock to gain momentum,” Wingate’s Padowitz said by phone today.
Deutsche Bank’s investment banking and trading unit saw its revenue slide 27 percent to 2.46 billion euros in the fourth quarter from the same period in 2012, the statement shows. The decline was led by a 31 percent drop in debt trading income, while revenue from trading equities increased 8 percent and that from advising clients on acquisitions and stock and bond sales was “stable,” the bank said.
The company said its transaction banking and money management units were profitable in the final three months of last year after posting losses in the fourth quarter of 2012, while pretax profit at its retail banking unit declined 24 percent.
Moody’s Investors Service lowered its outlook on Deutsche Bank’s credit rating to negative last month, saying the company’s plan to reorient its business and boost profitability has been hampered by rising litigation-related expenses.
Deutsche Bank had 2.3 billion euros set aside for legal costs at the end of December, down from 4.1 billion euros three months earlier. The company reached at least three settlements with regulators and clients last month, its filings show.
The bank agreed to pay U.S. financing companies Fannie Mae (FNMA) and Freddie Mac 1.4 billion euros to settle claims that it didn’t provide adequate disclosure about mortgage-backed securities. The European Commission fined Deutsche Bank 725 million euros on Dec. 4 for its part in rigging interest rates linked to theLondon interbank offered rate. The company said Dec. 19 that it reached a settlement to forfeit 221 million euros to end a derivatives contract with Italian bank Banca Monte dei Paschi di Siena SpA.
“Deutsche Bank management deserves credit,” Kian Abouhossein, an analyst with JPMorgan Chase & Co. in London who has an overweight recommendation on the stock, wrote in a note today. The firm “is still in restructuring mode but management has delivered on our wish-list of aggressive exposure reduction, bringing forward of cost savings and settlement of some litigations.”
Deutsche Bank is selling and winding down assets as regulators and investors call for banks to strengthen their finances by holding more equity as a share of their balance sheets.
The company had common equity Tier 1 equivalent to 9.7 percent of its assets weighted according to risk at the end of December, while capital accounted for 3.1 percent of its balance sheet under European Union definitions, according to the statement.
Deutsche Bank’s unit for selling and winding down loans and other assets saw its pretax loss narrow to 1.13 billion euros in the quarter from 1.65 billion euros a year earlier, the statement shows. That includes a 197 million-euro charge related to the planned sale of its BHF-Bank unit, the company said.
The firm’s risk-weighted assets fell to 355 billion euros at the end of the year from 365 billion euros three months earlier, while its balance sheet shrank to 1.45 trillion euros from 1.52 trillion under the EU standards, according to the statement.