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Deutsche Bank Reports Huge Loss

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Germany’s largest lender Deutsche Bank AG (DB - Free Report) reported its highest quarterly loss in almost four years. The loss per share came in at €2.31 in the fourth quarter of 2012, compared with the year-ago earnings per share of €0.15. The bank was hit hard by a slew of litigation as well as restructuring charges.

The bank’s net loss came in at €2.2 billion ($3.0 billion) in the quarter against net income of €186 million ($241 million) in the prior-year quarter. The loss was driven by a number of litigation as well as restructuring charges.

However, the quarterly results witnessed enhanced revenues. Particularly, the performance of its Corporate Banking and Securities segments improved significantly as market conditions elevated and client activity increased. Strong capital position was also a positive. Yet, these were mostly offset by costs related to restructuring efforts of Strategy 2015+, which was launched in September last year along with litigation related charges.

For full-year 2012, net income came in at €665 million ($862 million) or €0.64 per share compared with €4.3 billion ($5.6 billion) or €4.30 per share last year.

Quarter in Detail

Deutsche Bank reported net revenue of €7.9 billion ($10.2 billion), up 14% from the comparable quarter last year. The improvement was mainly attributable to increased revenues in Core banking division along with lower negative revenues in the Non-core operation unit.

For the full year, Deutsche Bank reported net revenue of €33.7 billion ($43.7 billion), up 2% from 2011.

Improved market conditions and higher market activity pulled up its Corporate Banking and Securities (CB&S) revenues 43% from the prior-year quarter to €3.4 billion ($4.4 billion).

At Deutsche Bank’s Global Transaction Banking (GTB) business, solid business volumes aided a 15% year-over-year expansion in revenues to €1.1 billion ($1.4 billion).

Moreover, Asset and Wealth Management (AWM) segment posted a year-over-year decline in revenues of 11% to €1.1 billion ($1.4 billion). The decline was attributable to effects from mark-to-market movements on investments held to back insurance policyholder claims in AbbeyLife, lower revenues of in Alternative Fund Solutions due to reduced demand for hedge fund products, partly offset by higher revenues from advisory/brokerage and lower non-interest expenses.

Also, Deutsche Bank’s Private & Business Clients (PBC) segment’s revenue stood at €2.4 billion ($3.1 billion), representing a decline of 7% from the prior-year quarter.

The provision for credit losses came down 20% from the year-ago period to €434 million.

However, non-interest expenses of €10.0 billion surged 49% from the year-ago period and  were significantly hit by €1.9 billion impairments of goodwill and other intangible assets, along with €1.0 billion of significant litigation-related charges.

Deutsche Bank’s core Tier 1 capital ratio based on Basel 2.5 rules came at 15.3% at the end of the reported quarter, up from 12.9% at the end of the prior quarter. The company adopted de-risking measures that led to decrease in capital deduction items and reduced risk-weighted assets. As of Dec 31, 2012, the bank’s Basel 3 core Tier 1 ratio came in at 8.0%, significantly above the Bank’s communicated target of 7.2%.

Risk-weighted assets moved down to €334 billion from €381 billion at the end of the year-ago quarter. Total assets dipped 7% to €2.0 trillion compared with €2.2 trillion at the end of the prior year quarter.

Strategic Efforts

Deutsche Bank is focused on scaling back its risk-weighted assets. Its de-risking measures are also on track. The company aims at achieving €90 billion of risk-weighted assets equivalent reduction by Mar 31, 2013. In the second half of 2012, the Bank achieved a reduction in Basel 3 risk weighted asset equivalents of €80 billion.

Hence, Deutsche Bank raises its target for the Basel 3 core Tier 1 capital ratio in the range of 8.0%-8.5% for Mar 31, 2013.

In its Strategy 2015+, the bank disclosed a number of initiatives aimed at bolstering its competitiveness through efficiency improvements cost cuts and reduced complexity. Further, the company altered the compensation practices of the top management. The new policies included the chief executives of the company having their bonuses paid after 5 years, instead of the previous practice of part-payment over a span of 3 years.

The company contemplates making investments of about €4 billion over the next 3 years in such measures to help achieve full run-rate annual cost savings of €4.5 billion by 2015 and slash more than 1900 jobs, mainly in the investment banking division. The initial phase of this revamping initiative has been implemented since the third quarter of 2012.

Our Take

Deutsche Bank has adopted several strategic initiatives, including the repositioning of its core business and bolstering of its capital levels. While these initiatives augur well for its growth, costs associated with such efforts cannot be ignored.

Hurt by the Eurozone debt crisis, Deutsche Bank experienced trading revenue declines in the past. Amid the stressed operating environment, lower returns and stringent capital norms, the company is rightsizing its business through job cuts and various restructuring initiatives.

Moreover, owing to macroeconomic uncertainty and cautious approach of management, we believe that Deutsche Bank would find it hard to report a substantial improvement in bottom line in the upcoming quarters.

Deutsche Bank currently retains a Zacks Rank #3 (Hold). Foreign banks that are performing well include Bank of China Limited , UBS AG (UBS - Free Report) and Credit Suisse Group (CS - Free Report) . Bank of China carries a Zacks Rank #1 (Strong Buy), while the other 2 stocks carry a Zacks Rank #2 (Buy).

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