Deutsche Bank Raises Bad-Loan Provisions, Sending Shares Lower
July 28 (Bloomberg) -- Deutsche Bank AG said it set aside 1billion euros ($1.4 billion) for risky loans in the secondquarter, more than analysts estimated, sending the stock to thebiggest decline in four months in Frankfurt trading.
The increase in provisions for bad loans at Germany’slargest bank overshadowed a 68 percent jump in net income to1.09 billion euros, led by higher revenue from trading bonds andstocks. The Frankfurt-based bank predicted a further increase inprivate and corporate insolvencies.
“Deutsche Bank had to significantly increase loan-lossprovisions because of the worsening economy, and it won’t getbetter anytime soon,” said Lutz Roehmeyer, who helps manageabout $15.5 billion at Landesbank Berlin Investment in Berlin,including Deutsche Bank shares.
Chief Executive Officer Josef Ackermann said in a letter toshareholders he remains “cautious” on the economic outlook andpredicted “continued pressure on the credit environment.” Loanprovisions rose from 135 million euros a year earlier, andexceeded the 634 million-euro estimate of analysts surveyed.
Deutsche Bank fell as much as 9.7 percent in Frankfurttrading, the biggest slump since March 30, and was down 4.48euros to 47.55 euros by 1:08 p.m. The bank has gained 71 percentthis year, the eighth-biggest increase on the Bloomberg index of63 European financial companies.
Debt and Equity
The investment bank, run by Anshu Jain and Michael Cohrs,posted pretax profit of 828 million euros after a loss a yearearlier. Analysts estimated earnings of 1.08 billion euros.
The company’s global markets business, run by Jain, haddebt trading income of 2.6 billion euros on credit, interest-rate and currency sales, a fourfold increase that fell short ofanalysts’ estimates. Equity trading generated 903 million eurosin revenue, the most in six quarters and more than analystspredicted.
Credit Suisse Group AG of Zurich and New York-based GoldmanSachs Group Inc. and JPMorgan Chase & Co. also generated highertrading income in the past quarter.
The asset and wealth management business reported a pretaxloss of 85 million euros, a bigger deficit than analystsestimated, compared with a year-earlier profit. Earnings at theconsumer bank fell 83 percent to 55 million euros.
“The investment bank generated a lot of revenue thanks tothe boom in corporate bond sales, but retail banking, asset andwealth management and transaction banking really lost out,”Roehmeyer said.
Progress in Economy
The bank posted a second straight quarterly profit afterreporting its first annual loss in more than 50 years in 2008amid the worst financial crisis since the Great Depression. Inthe second quarter, sales of corporate debt in Europe rose 12percent from a year earlier to 329 billion euros, data compiledby Bloomberg show.
“The outlook for the remainder of 2009 is stronglyinfluenced by progress in the global economy,” Ackermann, 61,said in the statement. “In an uncertain environment, DeutscheBank is well prepared,” and can take “full advantage ofopportunities, as and when business conditions improve,” hesaid.
The bank incurred 1.4 billion euros in charges, includingprovisions for credit losses, legal costs related to the failedbuyout of Huntsman Corp. and severance payments. The loan-lossprovisions at the bank almost matched the amount set aside forpossible defaults in all of 2008.
Capital Ratio Rises
Earnings were boosted by 377 million euros in pretax profitat the corporate investments unit, including gains fromderivatives related to the acquisition of Deutsche Postbank AGshares and stake sales in companies such as Daimler AG and LindeAG. The bank paid 242 million euros in income taxes, down from633 million euros in the first quarter, helped by tax-exemptasset disposals.
Ackermann had his contract extended by three years to 2013in April after guiding Deutsche Bank through the financialcrisis without taking government aid.
He boosted the bank’s tier 1 capital ratio, a measure ofsolvency closely watched by regulators, to 11 percent in thesecond quarter. He lowered the bank’s leverage ratio -- totalassets divided by shareholder equity, using U.S. accountingprinciples for derivatives -- to 24 times by the end of Junefrom 38 times a year earlier.
Non-interest expenses rose 21 percent to 5.6 billion eurosin the quarter, boosted by a 17 percent jump in compensation andbenefits to 3.14 billion euros as the company set aside moremoney for bonuses.
Earnings at the asset and wealth management business,headed by Kevin Parker and Pierre de Weck, suffered fromdeclining asset values, client withdrawals at the assetmanagement unit and charges related to a property fund. Earningsat the retail bank were hurt by rising loan provisions andseverance charges tied to job cuts. Pretax profit from globaltransaction banking fell 36 percent to 181 million euros.
Ackermann has built up those so-called stable businesses todecrease the company’s reliance on investment banking. Theinvestment bank, known as corporate banking and securities,generated 59 percent of total revenue in the quarter.
To contact the reporter on this story:Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net;Jann Bettinga in Frankfurt at jbettinga@bloomberg.net
Last Updated: July 28, 2009 07:27 EDTSource: Bloomberg
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