Deutsche Bank signals deeper cuts as trading slump hits profit

Bloomberg

Deutsche Bank AG Chief Executive Officer John Cryan signaled Germany’s largest lender may have to deepen cost cuts after second-quarter profit was almost wiped out by a slump in trading revenue and costs tied to job reductions. The shares declined.
Net income decreased to 18 million euros ($20 million) from 796 million euros a year earlier, the Frankfurt-based company said in a statement on Wednesday. Analysts forecast a loss of 22 million euros, according to the average of 11 estimates compiled by Bloomberg. The forecasts ranged from a profit of 524 million euros to a loss of 1.8 billion euros.
Cryan, 55, has been cutting risky assets, freezing dividend payments and eliminating about 9,000 staff to boost capital levels and reverse a slump that has made the stock the worst-valued global investment bank. While the CEO has called 2016 a peak restructuring year, his task has been complicated by mounting legal costs, record-low interest rates and volatile markets, with Britain’s decision to exit the European Union clouding economic prospects and potentially weighing on deal-making across the region.
“While our results show that we are undergoing a sustained restructuring, we are satisfied with the progress we are making,” Cryan said in the statement. “If the current weak economic environment persists, we will need to be yet more ambitious in the timing and the intensity of our restructuring.”
Deutsche Bank slipped 2.5 percent to 12.54 euros at 9:04 a.m. in Frankfurt. The shares have lost about 44 percent of their market value this year. At about a third, the company has the lowest price-to-tangible book value of the world’s nine largest investment banks. The discount indicates that it’s worth less than investors would expect to receive if the firm liquidated its assets.
Net revenue fell to 7.39 billion euros in the second quarter from 9.18 billion euros, while risk-weighted assets slipped 3.4 percent to 402 billion euros. The cost-to-income ratio, a measure of profitability, was 91 percent, up from 85 percent a year ago.
Restructuring and severance expenses surged to 207 million euros in the second quarter from 45 million euros a year earlier, while the bank also took a goodwill charge of 285 million euros tied to the transfer of businesses.

Capital Concerns
Deutsche Bank executives have struggled to reassure investors of the bank’s ability to increase its capital levels and pay coupons on certain debt securities. The lender’s common equity Tier 1 ratio, a key measure of its financial strength, rose to 10.8 percent at the end of June from 10.7 percent three months earlier. That’s in line with analyst estimates in a Bloomberg survey.
The company missed a goal of completing the sale of a 20 percent stake in Chinese lender Huaxia Bank Co. in the second quarter, a key step in raising capital levels. That transaction will be completed in the second half, adding about 40 basis points to the capital ratio, according to the statement.
Cryan has repeatedly said he doesn’t plan to sell shares, telling investors in May that the firm is making progress with its overhaul and that he is “convinced we can realize this transformation with our own funds.” The CEO wrote in a letter published on Wednesday that while “doubts were raised” about the lender’s financial strength, they were “unjustified.”

‘Mixed Numbers’
Under the new CEO, Deutsche Bank has been seeking to settle outstanding legal matters. The lender took 120 million euros in litigation charges in the second quarter, down from 1.2 billion euros a year earlier and has begun discussions with the U.S. Department of Justice on a potential settlement of claims based on the regulator’s investigation of the bank’s residential mortgage backed securities origination and securitization activities.
“Overall, this is a mixed set of numbers versus expectations with good cost-cutting progression,” George Karamanos, an analyst at Keefe Bruyette & Woods in London with an underperform recommendation on the shares, wrote in a note on Wednesday. “However, concerns over capitalization and internal capital generation remain since litigation charges were minimal.”
With regulators stepping up scrutiny of riskier activities, the German lender pulled out of some capital-intensive businesses at the global markets unit run by Garth Ritchie.
Fixed income and currencies trading revenue, the largest source of income, fell 19 percent to 1.82 billion euros in the second quarter. That’s below the 1.95 billion euros projected by analysts in a Bloomberg survey.
The five largest U.S. investment banks saw their combined debt trading revenue rise 22 percent in the second quarter from a year earlier, according to data compiled by Bloomberg.
Equity trading revenue slipped 31 percent to 720 million euros in the quarter from a year earlier, missing the 754 million-euro average estimate in a Bloomberg survey. Global markets is about halfway through its plan to exit some countries and has made “significant progress” with investments to strengthen the equities business, Cryan said.

‘Deutsche Bank has started US mortgage settlement talks’

BLOOMBERG

Deutsche Bank AG is nearing an agreement with the U.S. Department of Justice to settle a long-running investigation into its mortgage-backed securities business.
The bank is in talks “concerning a potential settlement of claims that the DOJ may consider bringing, based on its investigation of Deutsche Bank’s residential mortgage-backed securities origination and securitization activities,” the firm said Wednesday in its second-quarter earnings report.
Germany’s biggest bank has paid more than $9 billion in fines and legal settlements worldwide since the start of 2008, according to data compiled by Bloomberg. That includes settlements related to violations of U.S. sanctions, rigging of interest-rate benchmarks and allegations that it defrauded U.S.-backed mortgage issuers Fannie Mae and Freddie Mac.
U.S. authorities have already extracted more than $44 billion in fines from other banks for their role in creating and selling subprime mortgage bonds that helped spur the 2008 financial crisis. Goldman Sachs Group Inc. said in April it will pay $5.1 billion to resolve U.S. allegations that it failed to properly vet mortgage-backed securities before selling them to investors as high-quality debt.
Royal Bank of Scotland Plc said earlier this year that it was also in settlement talks with the U.S. for its handling of mortgage securities. The firm is expected to pay a multi-billion dollar penalty, according to analysts.
The US government’s mortgage-backed security resolutions stem from a working group of prosecutors and other officials that President Barack Obama ordered up in 2012 to punish Wall Street for fueling the financial crisis with bonds linked to souring mortgages. Until then, the Justice Department had been pilloried for years for not having brought significant cases against banks and their executives.