Deutsche Bank’s third-quarter results, 2011:
- A €777m profit, double forecasts but down from €1.1bn in the second quarter (excluding charges from the Deutsche Postbank merger)
- Sales and trading revenue €1.9bn (Q2: €2.9bn)
- …And also a second, €228m, write-down of its Greek government bonds held as available for sale (almost all acquired with Postbank). This time the write-down was more than half their value as of June.
Added to its second quarter €155m impairment, Deutsche has now marked down the €735m of AFS Greek debt it held on June 30, 2011 by about 52 per cent. Here are some more details from Deutsche’s full interim report:
Financial assets available for sale included Greek government bonds with a fair value of € 457 million as of September 30, 2011 and € 1.1 billion as of December 31, 2010. Substantially all of these bonds were acquired by Deutsche Bank as part of its acquisition of Postbank on December 3, 2010. The Group categorized Greek government bonds in Level 2 of the IFRS fair value hierarchy. Fair values as of September 30, 2011 were established from market data received from independent pricing sources.
Based on developments in the second quarter 2011, Deutsche Bank determined as of June 30, 2011, that there was objective evidence of impairment of all Greek government bonds classified as available for sale. As of that date all unrealized losses reported in accumulated other comprehensive income attributable to such bonds were recognized in the consolidated statement of income. Subsequent to June 30, 2011, fair value losses attributable to the impaired Greek bonds were also recognized in income. As a result of this impairment, for the nine months ended September 30, 2011, Deutsche Bank recognized a loss in income of € 383 million with a negative impact of € 268 million on net income. As of September 30, 2011, the average fair value of the Greek bonds is below 50 % of the notional.
Along the way, Deutsche has abandoned the 21 per cent markdown (that is, the net present value cut used in the first, abortive Greece bond swap) used in the second quarter. Compare and contrast Deutsche’s mark to ‘market’ (and Level 2 classification) to the French banks who marked their Greek bonds to model in the second quarter. Their argument was that the Greek bond swap had provided a cash-flow model and that there was no market basis for determining fair value.
The point is though, with a 60 per cent Greek debt haircut under discussion (let’s leave its merits for another post), Deutsche’s own ‘market’ write-down of Greek bond values arguably comes into line with how a new swap would look. We’ll have to wait and see how the French banks will treat their Greek bonds in their next results, but conceivably we suppose they could use the cash-flow model of any revised swap.
(Considering that the first swap fell through and the second swap is being hotly contested or is at least not certain to execute, is there an argument for banks starting to account for Greek bonds based on the expected recovery value? We’re not sure, so thoughts welcome.)
There’s a full break-down of Deutsche’s credit risk exposures to the periphery on pages 35 and 36 of the interim report, by the way. One chart here of gross credit risk exposure… (click to enlarge)
And the following of aggregate net exposure:
Related links:
Deutsche Bank’s casinos exposure hits $4.9bn – FT
Ready, set, impair those Greek bonds! – FT Alphaville
Don’t you know that you’re toxic? – FT Alphaville