Just to think, it wasn’t that long ago that Deutsche Bank was seen as one of the more fortunate – and astute – banks amid the credit crunch turmoil. Since then, the ugly truth has begun emerging in dribs and drabs.
On Thursday morning, Germany’s biggest bank reported a further €2.3bn ($3.6bn) of writedowns in the second quarter as profits declined sharply, taking its bill from the global financial crisis beyond $11bn.
As Reuters notes, Germany’s flagship financier had originally been seen as one of the winners in the chaos but as the problems on global markets continue, Deutsche Bank is being sucked ever deeper into trouble.
In a statement that offered investors little cause for cheer, Josef Ackermann, chief executive, said: “We remain cautious for the remainder of 2008″.
Announcing net income of €645m for the three months to June – down from €1.8bn in the same period in 2007 – Ackermann highlighted measures taken to cut exposure to some of the bank’s riskiest investments, reports the FT.
Deutsche’s writedowns included €1bn on residential mortgage-backed securities, €500m relating to the bank’s exposure to monoline insurers and €300m in commercial real estate investments.
The bank has now written down €5bn during 2008, while net revenues during the first six months fell from €18.4bn in 2007 to €10bn this year.
As expected, the biggest hit was taken by Deutsche’s corporate banking and securities division, which before the credit crisis generated most of the bank’s profits. The division suffered a pre-tax loss of €311m compared with profits of €1.8bn in the same quarter a year ago – the last before banks around the world started to feel the impact of the credit crisis.
Q2 net revenues halved within the corporate and investment banking business compared with a year ago. Advisory revenues also halved in a sign of the much tougher M&A environment.
Ackermann said Deutsche had cut its leveraged loan exposure by €5.7bn to €24.5bn, taking advantage of improving market prices, and had continued to make progress in early July after the end of the quarter. The bank also cut its commercial real estate exposure by €3.7bn.
Deutsche has resisted the idea that it needs to strengthen its capital base, in contrast with many other banks. It said its Tier 1 capital ratio was 9.3 per cent at the end of June, “well above” the bank’s target range of 8 to 9 per cent. Deutsche also shrank its balance sheet during the quarter by €159bn to under €2,000bn.
The bank had already signalled it would return to profit in the second quarter, after a net loss of €141m in the first three months. The net income reported in the period to June exceeded the €491m median predicted this month in a Bloomberg poll of analysts.
Ackermann pointed to the resilience of what Deutsche called its “stable” businesses. Net revenues from asset and wealth management fell 16 per cent compared with the second quarter last year, hit by lower fee and commission income. But Deutsche said this business had attracted €8bn of funds in the second quarter on top of €7bn in the first quarter.
Ackermann added that Deutsche was “under no pressure to make acquisitions” after missing out on buying Citigroup’s retail banking operations in Germany. It has also been linked with a possible bid for Deutsche Postbank, a domestic rival.
According to the FT, JPMorgan analysts estimated before the results that Deutsche still needed to make writedowns of €5.6bn, basing that view on the prices achieved by Merrill Lynch for its just-announced sale of CDOs.
One noteworthy point on the bank’s efforts to cut costs: In contrast to the jobcutting at many banks, Deutsche ended the period with more staff, having taken on 2,000 to more than 80,000, notes the FT.