Deutsche Bank warns of big hit to profit
Deutsche Bank grappling with a series of legal problems on both sides of the Atlantic, warned that restructuring costs would result in a substantial hit to the bank's fourth-quarter earnings and could tip it into a loss for the last three months of the year.
The bank said on Thursday that the fourth quarter would be affected by one-time charges linked to its restructuring plans and its integration of retailer Postbank, as well as charges from its transaction banking activities in the Netherlands.
"I wanted to make you aware that [the one-time items] could be substantial in nature and could lead to a loss," chief financial officer Stefan Krause said on a conference call with analysts Thursday.
Most analysts had projected net income of between €500m and €600m ($654m and $784m). The bank earned €147m in last year's fourth quarter.
The warning came a day after German prosecutors raided Deutsche Bank's Frankfurt headquarters in connection with a probe into alleged tax evasion. They said co-chief executive officer Jürgen Fitschen and Krause were under investigation because they had signed off on a tax document. Five other employees were arrested.
In a separate matter, the bank is also being investigated as one of several lenders suspected of manipulating interbank lending rates, including the London interbank offered rate, or Libor. Also, US authorities have indicated that foreign banks may have to adhere to rules that would force them to allocate more capital to their US operations.
And a Munich judge could rule as early as Friday that the bank has to pay hundreds of millions of euros in a long-running lawsuit over allegations that the bank helped cause the insolvency of Germany's Kirch Media Group.
"These guys have got a lot on their plate," Christopher Wheeler, a London-based banking analyst with Mediobanca, said of Deutsche's battles.
Deutsche Bank's stock fell 2.7% in Frankfurt.
With a balance sheet of €2.2 trillion, Deutsche Bank is Europe's largest lender, yet one of the least well-capitalised, analysts say. Its profits have been squeezed in Europe, while new regulations and back-to-back financial crises have rocked the investment-banking industry as a whole.
The bank's various legal problems on both sides of the Atlantic could potentially saddle it with as much as €2.5bn in costs for which it hasn't made provisions, Deutsche Bank said in its most recent quarterly report.
On Friday, a Munich court could rule against Deutsche Bank in its decade-long legal battle with the heirs of German media mogul Leo Kirch. In a preliminary assessment of the case last month, the presiding judge said he estimates Deutsche Bank's former chief executive, Rolf Breuer, caused damage of between €120m and €1.5bn to Kirch Media Group by saying in a 2002 television interview that the company seemed unlikely to receive any further loans from its banks. The judge added that it is likely Deutsche Bank and Breuer will be found liable when he rules.
The investigation that has drawn in Fitschen and Krause relates to allegations that Deutsche Bank participated in trades in carbon-emission certificates that were designed to evade value-added taxes, costing Germany's treasury hundreds of millions of euros. The bank has said it is cooperating with the investigation.
Deutsche Bank is also one of at least 16 banks under investigation for alleged manipulation of benchmark interest rates. News emerged Thursday that Swiss bank UBS is close to an agreement to pay more than $1bn to resolve allegations that it tried to rig rates to boost trading profits, roughly double what Barclays paid this year.
Analysts said the potential UBS settlement is a bad sign for Deutsche Bank and others under investigation.
"Kirch, Libor, carbon emissions, that's all going to hit the [capital] base" if and when the bank is forced to pay, Wheeler said. "This is just not helpful."
Deutsche Bank is seeking to trim its non-core operations, part of a larger movement among investment banks globally to reduce risk and comply with new regulations, while attempting to cope with a weak business environment. Investment banks have cut tens of thousands of jobs. Many have concluded that thinner profit margins make it no longer worthwhile to compete as second- or third-tier players.
In recent weeks, UBS and Citigroup have unveiled a total of more than 20,000 job cuts. Credit Suisse has made significant investment-banking cuts, while Barclays also plans to eliminate as many as 2,000 jobs in its investment bank as part of a broad restructuring of the company, according to people familiar with the matter.
During its September strategy presentation, Deutsche Bank's new co-CEOs, Anshu Jain and Fitschen, said they planned annual cost cuts of €4.5bn by 2015, which would result in one-time restructuring costs of €4bn over three years.
The bank also said this summer that it would cut 1,900 jobs, most in the investment bank, on top of 500 jobs last year.
In the third quarter, Deutsche Bank reported expenses related to its new restructuring and cost-cutting program of €320m, in addition to €71m for the integration of Postbank.
Deutsche Bank had feared that bringing its US arm into compliance with the Dodd-Frank law could force it to inject up to $20bn of new capital into the unit, according to an internal memo reviewed by The Wall Street Journal last year. Instead, Deutsche Bank converted its large US investment bank into a direct offshoot of the German parent company, enabling it to avoid Dodd-Frank's tougher capital requirements.
Krause said it is too soon to say how any new rules would affect the bank.
In addition, Krause addressed at length reports that US securities regulators are investigating allegations that the bank hid billions of dollars of paper losses during the financial crisis. He said law firm Fried, Frank, Harris, Shriver & Jacobson, in conjunction with the Securities and Exchange Commission and the Federal Reserve, had examined whistleblowers' claims that traders at Deutsche Bank overvalued a portfolio of derivatives to hide rapidly mounting losses when financial markets were collapsing in 2008.
"Because of significant efforts of the individuals directly involved in that process, the bank valuations and financial reporting were proper during the period in question and the allegations of fraud are wholly unfounded," Krause said.
