Sunday 25 February 2018

Deutsche Bank shares slump after surprise loss

File photo of the headquarters of Deutsche Bank in Frankfurt.
File photo of the headquarters of Deutsche Bank in Frankfurt.

Deutsche Bank shares tumbled today following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany's biggest bank said revenue at its important debt-trading division, fell 31pc in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading. Deutsche's bond trading business is one of its biggest and contributed 73pc of total trading revenue in 2013, the bank said.

The unexpected loss is likely to compound problems that have dogged the bank over the past year, which include a list of lawsuits and regulatory wrangles. It will also increase pressure on co-chief executives Anshu Jain and Juergen Fitschen to overhaul the group, including pushing through a culture change.

Deutsche's bond trading slump highlights the impact of a debt market slowdown in anticipation of an end to the U.S. Federal Reserve's bond buying to help the U.S. economy.

But bond trading revenues at other big investment banks have not fallen as sharply as at Deutsche. At Goldman Sachs (GS.N) and Citi (C.N), for example, revenue from bond trading fell 11pc and 15pc respectively in the fourth quarter.

"The investment bank is losing market share," Shailesh Raikundlia, a London-based analyst at Espirito Santo, said. "They're losing ground to the likes of Barclays because they don't have the capital (to support a big investment bank)."

Heavy costs for litigation and restructuring also hit the bank's performance, as well as one-off accounting charges.

Litigation cost it €528m in the quarter, bringing the year's bill for fines and settlements to €2.5bn and lowering litigation reserves to €2.3bn at year-end.

Deutsche was fined $1.9 billion in December by the U.S. Federal Housing Finance Agency and was also fined €725m by European Union antitrust regulators for rigging benchmark interest rates.

The bank's fourth-quarter pre-tax loss was €1.15bn.

Deutsche's shares fell as much as 5pc but pared losses to trade down 3.66pc in early morning trade, compared with a decline of 0.62 percent by an index of its peers .SX7P.

RESTRUCTURING

On the positive side, the bank's restructuring plan is ahead of target and its all-important capital ratios met industry expectations even after the higher losses thanks to a greater than expected reduction in assets.

Analysts had been positive about Deutsche before the bank's unexpected publication of results  on Sunday, with 23 of the 36 covering the stock rating it a "strong buy" or "buy" and another seven rating it a "hold," according to Thomson Reuters data.

Analysts at JPMorgan remained positive, saying management deserved credit for cutting balance sheet exposure and settling some outstanding litigation. JPMorgan has Deutsche Bank rated "overweight".

"Overall, we believe Q4 results show that DB 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 litigation," JPMorgan said.

Citi analyst Kinner Lakhani said even though Deutsche's story was two steps forward, one step back the shares still offered significant upside potential for patient investors.

Before Monday, Deutsche Bank shares had rallied 13pc so far in 2014, in line with European banking rivals.

The bank took a one-off charge of €197m from the expected sale of BHF-Bank and accounting charges. And Deutsche also took 623 million euros of charges for credit valuation adjustments (CVA), debt valuation adjustments (DVA) and funding valuation adjustments (FVA).

"The CVA and DVA are things that as analysts we tend to strip out," said Espirito Santo's Raikundlia. "It's an accounting thing that doesn't make any difference overall in the grand scheme of things."

The bank posted full-year pre-tax profit of €2.1bn, half of the €4.21bn expected by analysts, according to data from Thomson Reuters I/B/E/S. The bank was originally scheduled to report results on January 29.

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