By Eyk Henning
FRANKFURT-- Deutsche Bank AG's embattled top management
surprised investors Thursday by reporting a return to profit on
lower litigation reserves and higher investment-banking
revenues.
But co-Chief Executives Anshu Jain and Jürgen Fitschen said
heavy legal expenses and regulatory burdens still loom over the
bank and indicated further cost cuts are necessary to regain
investors' favor.
Germany's largest bank posted an unexpected net profit of EUR438
million ($494 million) in the quarter ended Dec. 31. The average of
analysts' forecast was for a EUR289 million loss, according to a
poll by The Wall Street Journal. The bank reported a EUR1.4 billion
loss in the fourth quarter a year earlier. Deutsche Bank shares
were up 2.7% in afternoon trading in Frankfurt.
"While we are encouraged by many of our full-year and
fourth-quarter business results, we are working hard to further
manage our cost base...and increase our returns to shareholders,"
the co-CEOs said in a statement.
The bank acknowledged that there is potential bad news to come.
The lower litigation reserves were largely an issue of timing and
legal disputes could squeeze profits in the near future. Management
also suggested it may lower its profit targets for this year.
Deutsche Bank is currently finishing a strategic review. The
co-CEOs indicated the plan, to be presented this spring, will focus
on boosting efficiency and returns. "We need to cut costs," and
trim the bank's balance sheet, Messrs. Jain and Fitschen said in
conference calls with analysts and journalists.
The executives are under pressure to accelerate the bank's
turnaround and improve results because its share price has lagged
behind those of international rivals over the past year. The two
men declined to comment on whether they might sell or float
Deutsche's Postbank retail subsidiary, which is an option on the
table, according to people familiar with the matter.
Performance targets "continue to be challenging," said finance
and strategy chief Stefan Krause. Mr. Krause, who said the bank
will update profit forecasts in the near future, pointed out that a
levy that feeds Germany's bank-rescue fund will be "some hundred
million [euros] higher" than the EUR148 million levied in 2014 and
be booked predominantly in the first quarter
In the fourth quarter, Deutsche Bank's revenue rose by 19% to
EUR7.8 billion. The bank's typically strong fixed-income and
currency-trading activities underpinned the growth, with revenue up
13% to EUR1.1 billion. That is above what many analysts expected
and better than U.S. rivals including Citigroup Inc., J.P. Morgan
Chase & Co. and Goldman Sachs Group., The U.S. banks'
fixed-income, currency- and commodity-trading revenue declined by
23% on average in the fourth quarter, according to Morgan
Stanley.
Mr. Jain's strategy to keep Deutshce Bank's fixed-income and
currency-trading operations largely intact, in contrast with many
European rivals, for now appears to be paying off. "We've seen the
typical seasonal pick up in this year's first-quarter
[fixed-income] trading compared with last year," Mr. Jain said. The
operations have more room to cut costs and shrink their balance
sheet, he said.
Deutsche's entire investment banking business reported a 34%
rise in pretax profit to EUR516 million.
The bank's fourth-quarter results also improved because it set
aside just EUR207 million to cover potential fines from looming
litigation, below the EUR1.11 billion in provisions a year earlier
and less than the EUR900 million Morgan Stanley analysts had
expected.
The decrease was due to delayed settlement talks in some
important cases, the bank said. "We don't expect litigation will be
lower," Mr. Krause said. "We aren't in control of timing in
settlements."
Deutsche Bank is among a group of global lenders under
investigation for their alleged role in manipulating the London
interbank offered rate, or Libor, and currency fixings, and of
violating U.S. sanctions for embargoed countries like Iran. While
regulators privately say that Libor investigations are largely
completed and could be settled in the first half of this year,
investigations into the bank's alleged involvement in
foreign-exchange markets will drag into the second half of the
year.
As of now, Deutsche Bank has a total EUR3.2 billion in reserves
to cover potential legal fines.
Deutsche Bank's retail operations made a EUR55 million pretax
profit, compared with EUR370 million expected by analysts and
EUR218 million reported in the fourth quarter a year earlier. The
decline was due in part to a provision of more than EUR330 million
for potential claims from retail-banking clients following a recent
verdict from Germany's Supreme Court that affects the wider German
banking industry. Analysts hadn't included the hit in their
estimates.
Results at Deutsche Bank's retail unit were also weighed down by
high costs for the integration of Postbank. Deutsche aims to reap
more than EUR1 billion in annual synergies once the integration
finishes. The bank's two other main units, asset and wealth
management and global transaction banking, recorded better pretax
profit on higher revenue and lower costs.
Write to Eyk Henning at eyk.henning@wsj.com
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