Deutsche Bank AG, Germany’s largest bank, said profit fell 76 percent in the fourth quarter as Europe’s sovereign-debt crisis curbed trading and the company booked writedowns on holdings.
Net income fell to 147 million euros ($194 million) from 601 million euros a year earlier, the Frankfurt-based company said today in astatement. That missed the 556 million-euro average estimate of 12 analysts surveyed by Bloomberg. The investment bank had a 422 million-euro pretax loss.
Chief Executive Officer Josef Ackermann, who is delivering full-year results for the last time before stepping down at the end of May, was forced to abandon his goal of posting record profit last year as clients shied from trades amid the debt crisis. Deutsche Bank also took charges on litigation, Greek government bonds, Icelandic generic drug maker Actavis Group hf, a Las Vegas casino and its BHF-Bank AG unit in the fourth quarter, according to the statement.
“You can’t be optimistic given the market environment,” Olaf Kayser, an analyst with Landesbank Baden-Wuerttemberg who recommends investors buy the stock, said before the results were published. “The client activity just isn’t there, you can see it from the number of transactions falling.”
“Broadly the situation has improved, particularly the one in Europe,” Jain, the 49-year-old head of the investment bank, told Bloomberg Television’s Erik Schatzker in Davos, Switzerland, on Jan. 26. “But look, the possibility of a tail event continues to hang over us.” Until that changes, “high volatility is the new norm, and one we’ll all need to just live with,” he said.
Deutsche Bank advanced 21 percent in Frankfurt trading since the European Central Bank said Dec. 8 it would offer unlimited three-year loans to lenders — a decision Ackermann described to CNBC as important in easing some of the banking system’s “funding challenges.” Bloomberg’s 43-company European banks index climbed 15 percent in the period.
New York-based JPMorgan Chase & Co., the biggest U.S. bank by assets, posted a 23 percent decline in profit on lower investment-banking fees and revenue from trading stocks and bonds. Earnings at Goldman Sachs Group Inc., also based in New York, dropped 58 percent, leading the firm to cut compensation in response to falling revenue. Among the five largest Wall Street banks, only Morgan Stanley posted an increase in trading income, excluding accounting gains, in 2011.
Deutsche Bank scrapped in November its operating pretax profit forecast of 10 billion euros for 2011 and announced 500 job cuts amid a “significant and unabated slowdown in client activity.” Ackermann’s purchase of Deutsche Postbank AG and Sal. Oppenheim Group to build up consumer-banking and wealth- management have failed to make up for lower investment banking.
The investment bank’s loss compared to a 603 million-euro pretax profit a year earlier and the 233 million-euro profit estimate from nine analysts. Revenue from debt trading dropped to 1.04 billion euros from 1.61 billion euros, missing the 1.47 billion-euro estimate, while equity trading revenue decreased to 539 million euros from 872 million euros, beating the 457 million-euro analyst survey.
Deutsche Bank booked costs of 380 million euros at the investment bank related to litigation and 154 million euros for U.K. and German bank levies.
Deutsche Bank consolidated the results of Postbank in December 2010, a purchase that followed the acquisitions of private-wealth manager Sal. Oppenheim and ABN Amro Holding NV’s commercial-banking operations in the Netherlands, as Ackermann added businesses with more predictable profits than investment banking.
Pretax earnings at the consumer banking unit climbed to 227 million euros from 222 million euros, missing the 384 million- euro average estimate in the analyst survey. The bank took charges on Greek bonds held at Postbank. Profit from the asset and wealth management business rose to 165 million euros, lower than the 180 million-euro estimate.
Deutsche Bank cited a “more challenging market environment” at the asset and wealth management division.
The company has been a “big winner” in taking market share from rivals, Jain said in the interview, and there’s an opportunity for more gains as changes in the industry, including tougher capital rules and a restriction on business models, create a “winnowing out” among financial firms.
European leaders are demanding that some of the region’s largest banks increase reserves after financial firms agreed to accept losses on Greek debt to help rescue the country. Deutsche Bank was among six German banks told to raise a total of 13.1 billion euros to boost core Tier 1 capital as a ratio of risk- weighted assets to 9 percent or more by June 30, after writing down the value of sovereign bonds.
The company said Dec. 8 that it expected to plug the 3.2 billion-euro gap calculated by the European Banking Authority six months early, without saying how it will meet the goal.
The German firm in November announced a strategic review of its global asset-management division, excluding operations of the DWS mutual fund unit in Germany, Europe and Asia. Executives decided last month to pursue a sale of the businesses, which have almost 400 billion euros in assets under management, according to two people with knowledge of the matter.
Analysts will be watching for any further signs the bank will change direction under its new leadership.
“It’s going to be exciting if strategic changes are announced,” said Kayser, the LBBW analyst. “The first steps are known, with the planned sale of asset-management operations.”
Deutsche Bank posted an impairment of 407 million euros related to Actavis, 97 million euros in expenses related to BHF- Bank and a 135 million-euro charge from the Cosmopolitan Resort & Casino in Las Vegas, which Deutsche Bank took over in 2008 when developer Ian Bruce Eichner defaulted on a loan. The writedowns contributed to a loss of 722 million euros at the corporate investments unit in the quarter.
The German lender took a 144 million-euro impairment charge on Greek bonds at its private clients and asset management unit, according to the statement.
Global regulators may expand the definition of a too-big-to-fail financial firm, signing up domestic lenders, clearing houses and insurers to capital rules designed for the world’s biggest banks.
The “framework should be in place for domestically systemically important banks by the end of the year,” Mark Carney, chairman of the Financial Stability Board, said yesterday after a meeting of the group inBasel, Switzerland.
Deutsche Bank AG (DBK), BNP Paribas SA (BNP) and Goldman Sachs Group Inc. (GS) were among 29 banks subject to the so-called capital surcharge on globally systemic financial institutions drawn up by the FSB in November. Banks will have to boost reserves by 1 to 2.5 percentage points above minimum levels agreed on by international regulators.
“The world contains a whole slew of institutions like that which are not systemic on a global level but are on a national level,” Simon Gleeson, regulatory lawyer at Clifford Chance LLP, said in a telephone interview. “The institution most interesting in this regard is Erste Bank,” he said. “The more you look at it the more you think it’s systemically important to Hungary.”
Carney said that the FSB was considering putting in place tougher rules for so-called shadow banks whose failure could harm the global financial system. This work was less advanced than rules for systemic insurers, he said, adding that requirements would vary for different types of institutions.
“Despite the important steps that have been taken over the last couple of years, we are all aware that, in the short term, vulnerabilities remain,” Carney said.
The European Central Bank warned last year that shadow- banks require more scrutiny from regulators on the risks they pose to the financial system, while Michel Barnier, the European Union’s financial services commissioner, said that he will “go as fast as we can” in considering possible rules for them.
The FSB will review its work on shadow banks by March, the board said yesterday in a statement issued following its meeting.
Global regulators will also work on rules to ensure the robustness of clearing houses, the FSB said in the statement. Regulators should be able to take decisions by June on the “appropriate form” of central clearers dealing with derivatives, it said.
The FSB will also set up a group to examine cross-border disputes over rules governing banker pay, Carney said, acknowledging an “enduring mistrust” between banks over how lenders set their pay.
Regulators will together “address specific level playing field concerns” raised by their respective banks, the board said.
“This will be another tough year for the FSB,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail. “Although much of the regulatory agenda has been put in place, there remains a huge amount of work to be done on implementation.”
Carney said that the board may not replace former Swiss National Bank Governor and FSB Deputy Chairman Philipp Hildebrand, following his resignation this week over a currency trade made by his wife.
The decision will be taken “in the fullness of time and in consultation with G20,” he said.
European regulators have demanded the regions’ banks raise 114.7 billion euros ($146.6 billion) in new capital as part of measures designed to boost their resilience during the euro area’s sovereign-debt crisis.
German banks need to raise an additional 13.1 billion euros, Italian banks 15.4 billion euros, and Spanish lenders 26.2 billion euros in core tier 1 capital, the European Banking Authority in London said in December.
The capital shortfalls include 15.3 billion euros for Spain’s Banco Santander SA (SAN) and 7.97 billion euros for Italy’s UniCredit SpA. (UCG) Lenders in the region have until the end of June to raise the money.
Goldman Sachs & Co., a unit of the most profitable bank in Wall Street history, took $15 billion from the U.S. Federal Reserve on Dec. 9, 2008, the biggest single loan from a lending program whose details have been secret until today.
The program, which peaked at $80 billion in loans outstanding, was known as the Fed’s single-tranche open-market operations, or ST OMO. It made 28-day loans to units of 19 banks between March 7, 2008, and Dec. 30, 2008. Bloomberg reported on ST OMO in May, after the Fed released incomplete records on the program. In response to a subsequent Freedom of Information Act request for details, the central bank disclosed borrower names, amounts borrowed and interest rates.
ST OMO is the last known Fed crisis lending program to have its details made public. The central bank resisted previous FOIA requests on emergency lending for more than two years, disclosing details in March of its oldest loan facility, the discount window, only after the U.S. Supreme Court ruled it had to. When Congress mandated the December 2010 release of data on special initiatives the Fed created in its unprecedented $3.5 trillion response to the 2007-2009 collapse in credit markets, ST OMO — an expansion of a longstanding program — wasn’t included.
“The Fed has come a long way over a long period of time as far as transparency,” said Raymond W. Stone, managing director and economist with Stone & McCarthy Research Associates in Princeton, New Jersey. “They thought counterparties might be harmed, but now so much time has passed that the information is not as sensitive anymore.”
The 19 borrowers from the program are known as primary dealers, which are designated to trade government securities directly with Federal Reserve Bank of New York. They bid at auctions for ST OMO’s cash. While the rates they paid generally tracked the federal funds rate, the rate for some dipped as low as 0.01 percent in December 2008.
The New York Fed conducted 44 ST OMO auctions, according to its website. Banks bid the interest rate they were willing to pay for the loans and pledged mortgage-backed securities guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac as collateral for the Fed’s cash. The transactions were known as repurchase agreements, or repos.
ST OMO was an expansion of longstanding open-market operations, which offered cash for up to two weeks and were used as a tool of monetary policy. In March 2008, the Fed adapted the program to alleviate pressures in short-term credit markets, according to a news release the central bank issued at the time.
The program shouldn’t be grouped with the Fed’s other crisis lending initiatives because it was “not outside of the Fed’s standard authorities,” David E. Altig, senior vice president and director of research at the Federal Reserve Bank of Atlanta, said in his blog in May.
The New York Fed posted aggregate data about the program on its website after each auction, said Jeffrey Smith, a New York Fed spokesman. By increasing the availability of short-term financing when private lenders were under pressure, “this program helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses,” he said. All of the ST OMO loans were repaid.
Some primary dealers used the program to help customers, such as hedge funds, finance their holdings of mortgage-backed securities, Stone said.
“The Fed didn’t want to just finance the primary dealers, they wanted the mortgage-backed securities market to become more fluid,” Stone said.
Credit Suisse Securities USA LLC, a unit of Switzerland’s second-biggest bank, had $45 billion in loans outstanding on Aug. 27, 2008 — the largest peak borrowing amount, the data show.
“Credit Suisse was a net creditor throughout the crisis and made between $30 and $70 billion of liquidity available to central banks each day,” said Victoria Harmon, a spokeswoman for the bank in New York.
Six of the program’s top seven borrowers were units of foreign banks, the data show.
Goldman Sachs’s peak outstanding loans were the second- highest at $34.5 billion on Dec. 31, 2008, when interest rates were at their lowest, according to the data. Michael DuVally, a spokesman for New York-based Goldman Sachs Group Inc. (GS), the parent company of the primary dealer, declined to comment.
Lehman Brothers Inc. had two loans totaling $2 billion outstanding when its parent investment bank filed the biggest bankruptcy in U.S. history on Sept. 15, 2008, the data show. Those loans were repaid on Sept. 18, 2008, under a separate agreement, the Fed’s release said. Lehman’s peak borrowings from ST OMO reached $18 billion on June 25, 2008, according to the data.
Kimberly Macleod, a Lehman spokeswoman, didn’t immediately respond to an e-mail seeking comment.
RBS Securities Inc., a unit of Britain’s second-biggest bank by market capitalization, had $31.5 billion in loans outstanding on Oct. 8, 2008, and UBS Securities LLC, part of Switzerland’s biggest bank, borrowed as much as $20.5 billion on Nov. 26, 2008, the Fed said.
Among the smallest loans was one to Bear Stearns & Co., the primary-dealer unit of Bear Stearns Cos. The primary dealer took one loan from ST OMO for $500 million, on March 12, 2008, according to the release. JPMorgan Chase & Co. (JPM) bought the New York-based investment bank four days later. The loan was repaid on April 9, 2008, the data show.
The information on ST OMO is available on the central bank’s Web site: http://www.federalreserve.gov/monetarypolicy/bst_tranche.htm