Deutsche Bank profits surprise by rates, litigation continue to weigh

Added 27th October 2016

Deutsche Bank posted a net profit of €278m for the third quarter, beating analyst expectations and keeping the wolves at bay, for now.

Deutsche Bank profits surprise by rates, litigation continue to weigh

While revenues improved slightly, as did capital ratios, the bank continues to face a number of other challenges. Not only does it expect general economic conditions to remain difficult for all of its business units, but there remains the threat of a $14bn fine from the US department of Justice in relation to its mortgage backed securities business in the years leading up to the crisis.

According to CEO, John Cryan, while the results demonstrate the strengths within its operating business, the newsflow surrounding its negotiations with the DoJ has had  “an unsettling effect”.

Unable to provide an update on the talks, specifically, on a call with analysts, CFO Marcus Schenck said the bank “remains committed to coming to a resolution of the matter at a reasonable cost”.

During the quarter, the bank increased its litigation reserves from €5.5bn to €5.9b, but said it has made good progress on settling some of the other outstanding matters.

The two highlighted by Schenck were the decision by the CFTC in the US to drop its global investigation into the bank and the $98m first mover settlement paid in the quarter in relation to the gold and silver class action suits in the US, which the remaining banks failed to have dismissed.

Operating units

Within its operating units, Private, wealth and commercial clients saw a 20% jump in net revenues during the quarter. This translated to a pre-tax profit of €117m, which Deutsche Bank said was hit by the persistent low interest rate environment and the continued volatile markets that “led to reduced activity of our clients”.

Asset management grew net revenues 30% to €823m and generated a pre-tax income of €216m, up 52% quarter on quarter.

“Management fees decreased by €33 million, or 6 %, mainly due to net outflows and margin impacts on invested assets,” the bank said.

Adding: “Performance and transaction fees increased by € 15 million, or 53 %, mainly from stronger performance fees within Alternatives. Other revenues decreased by € 35 million, or 50 %, due to lower dividend income and investment gains from Alternatives and Active compared to a strong prior year quarter. Mark-to-market movements on policyholder positions in Abbey Life increased by € 242 million following higher market gains.”

global markets saw a 10% jump in net revenues, largely driven by an improved performance within its debt sales and trading business the firm said. However, it did include a €30m provision for credit losses, taking the provision for the nine months to €84m.

Credit loss provisions were also raised in the firm’s corporate and investment banking unit, in this case from €90m in the previous quarter to €176m for the three months to end September.

The year-on-year increase in credit loss provisions reflect, the bank said: “continued provisioning on exposures in shipping, and oil & gas. These sectors continue to be affected by adverse macro-economic developments.”

Postbank revenues fell 9% to €267m hindered too by the low interest rate environment.

“Net revenues in Current Accounts, Savings and Home Loans & Savings declined due to the continued low interest environment. Net revenues from Loans, Investment & Insurance Products and Postal remained virtually stable compared to the prior year quarter,” the bank said. 

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Geoff Candy

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Geoff Candy joined Portfolio Adviser as News Editor in May 2014. He has been a financial journalist and broadcaster since 2005 and, in that time has worked in both South Africa and the Netherlands, covering everything from high street retailers and construction companies to mining and insurance.

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