A breakdown of Deutsche Bank's third-quarter results underscored the German lender's reliance on the volatile investment banking sector as it more than doubled provisions for bad loans. Germany's flagship bank said on Thursday all divisions were profitable in the quarter but the main driver of earnings was the investment bank, which accounted for three-quarters of the 1.3 billion euro ($1.92 billion) pretax profit the group reported last week.
The Frankfurt-based lender, which is attempting to wean itself off income from its sales and trading division, said it would continue to reduce its risk profile. It said provisions for credit losses rose to 544 million euros in the third quarter from 236 million euros in the year-earlier period, but down from 1 billion euros in the second quarter and less than analysts had expected. Deutsche is already diversifying its revenue stream through acquisitions such as wealth manager Sal. Oppenheim, a stake in retail bank Deutsche Postbank and some assets from ABN Amro.
"Even after ABN, Sal. Oppenheim and Postbank, Deutsche will make 60 percent of profits from investment banking. Of this, two-thirds is geared toward fixed income, a business mix geared toward declining revenues," J.P. Morgan analyst Kian Abouhossein said.
The introduction of new international regulations forcing banks to hold more capital and reduce debt have dimmed the outlook for the entire investment banking sector. Following its shopping spree, Chief Financial Officer Stefan Krause said the German bank would seek to conserve its capital base by holding off on purchasing more shares in Postbank and by keeping a conservative dividend policy. At 1147 GMT Deutsche shares were up 1.7 percent at 49.73 euros, in line with the DJ Stoxx European banking index.
Shares in Deutsche Bank - which has eschewed the state aid that has propped up many peers - trade at around 8.2 times 12-month forward earnings, according to StarMine, which weights analyst views by their forecasting accuracy. That is a discount to rivals UBS and J.P. Morgan Chase on over 14 times and Credit Suisse at 8.8 times. Deutsche's provisions related mainly to exposure in leveraged finance and commercial real estate and deteriorating loans in Poland and Spain, the company said.
Loan loss provisions in the US and most European countries should peak within the next six months, Deutsche said, adding that favourable valuations in some asset classes should support the bank's securities business in the fourth quarter. "The earnings are high quality," WestLB analyst Georg Kanders said. "All units performed better than I had expected. The low level of risk provisions was positive."
Chief Executive Josef Ackermann said the global credit crisis created opportunities for Deutsche to bolster its long-term competitive position. "Looking ahead, we see challenges and opportunities in the environment. We are well prepared for both," he said in a statement.
Like rivals Credit Suisse, J.P. Morgan and Goldman Sachs, Deutsche's sales trading business was boosted by a recovery in equity markets. Deutsche Bank made a net profit of 1.4 billion euros, flattered by 369 million euros in net tax benefits relating to tax audit settlements for prior years, revaluation gains, and gains from the sale of a stake in carmaker Daimler. The Thomson Reuters I/B/E/S estimate for net income had been just 755 million euros.
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