Deutsche Bank warns of challenges ahead after surprise loss

Monday 20 January 2014 18.43
Deutsche Bank's fourth quarter results issued over a week earlier than expected
Deutsche Bank's fourth quarter results issued over a week earlier than expected

A surprise fourth-quarter loss at Deutsche Bank saw shares at the bank fall sharply before recovering most of their ground by the end of the day.

The loss came after a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany's biggest bank said revenue at its important debt-trading division fell 31% in the quarter, a much bigger drop than at US rivals, which have also suffered from sluggish fixed-income trading. 

Deutsche's bond trading business is one of its biggest and contributed 73% of total trading revenue in 2013, the bank said.

The unexpected loss is likely to compound problems that have dogged the bank over the past year, which include a list of lawsuits and regulatory wrangles.

It will also increase pressure on co-chief executives Anshu Jain and Juergen Fitschen to overhaul the group, including pushing through a culture change.

Deutsche's bond trading slump highlights the impact of a debt market slowdown in anticipation of an end to the US Federal Reserve's bond buying to help the US economy.

But bond trading revenues at other big investment banks have not fallen as sharply as at Deutsche. At Goldman Sachs and Citi, for example, revenue from bond trading fell 11% and 15% respectively in the fourth quarter. 

Heavy costs for litigation and restructuring also hit the bank's performance, as well as one-off accounting charges.

Litigation cost it €528m in the quarter, bringing the year's bill for fines and settlements to €2.5 billion and lowering litigation reserves to €2.3 billion by the end of the year.

Deutsche was fined $1.9 billion in December by the US Federal Housing Finance Agency and was also fined €725m by European Union competition regulators for rigging benchmark interest rates.

The bank's fourth-quarter pre-tax loss was €1.15 billion. 

Deutsche's shares fell as much as 5% in morning trade, but pared losses to trade down 3.66% in later trade.

On the positive side, the bank’s restructuring plan is ahead of target and its all-important capital ratios met industry expectations even after the higher losses thanks to a greater than expected reduction in assets.

Analysts had been positive about Deutsche before the bank's unexpected publication of results late last night, with 23 of the 36 covering the stock rating it a "strong buy" or "buy" and another seven rating it a "hold," according to Thomson Reuters data.

Before today, Deutsche Bank shares had rallied 13% so far in 2014, in line with European banking rivals.

The bank took a one-off charge of €197m from the expected sale of BHF-Bank and accounting charges. And Deutsche also took €623m of charges for credit valuation adjustments (CVA), debt valuation adjustments (DVA) and funding valuation adjustments (FVA).

The bank posted full-year pre-tax profit of €2.1 billion, half of the €4.21 billion expected by analysts, according to data from Thomson Reuters. The bank was originally scheduled to report results on January 29.