It has been only six months, but it’s certainly not the start that John Cryan would have hoped for as chief executive of Deutsche Bank.
Germany’s largest bank on Wednesday night said it posted a record €6.7 billion loss for 2015. It is the biggest annual loss in the bank's history, exceeding €3.9 billion during 2008 at the height of the global financial crisis, and a setback that Mr. Cryan, in a letter to bank workers, called “sobering.”
The bank said it took €1.2 billion in provisions to cover legal costs in the fourth quarter, as it still struggled to overcome a costly legacy of criminal action by some employees during the runup to the 2008 financial crisis.
The magnitude of the 2015 loss, which including a €2.1 billion loss in the fourth quarter, surprised investors.
The news "came as a surprise, especially the high provisions made for legal disputes,” said Markus Riesselmann, an analyst in Frankfurt at Independent Research. “We had not expected them to be in this magnitude, nor had we expected the restructuring charges.”
Investors dumped the bank's shares. As of noon Thursday, Deutsche Bank's shares were down 7.8 percent in Frankfurt at €16.35. The bank’s record-low share price of €14.69 in January 2009 is now in sight.
“What we are seeing on the stock market is a withdrawal of confidence. Capital markets are asking themselves, how much longer this shrinking down to health will continue, and how hard it will impact profits," Ingo Speich, fund manager with Union Investment, a Deutsche Bank shareholder, told Handelsblatt.
Since Mr. Cryan took over last July, the bank’s share price has plunged 40 percent. Most analysts say it’s too early to speculate about the chief executive’s future at Deutsche Bank less than a year into the job.
“After only half a year in the top position, it is much too early to make a judgment about John Cryan," Mr. Speich said. The next two years would be painful for shareholders, Mr. Speich acknowledged, but said there would be "clarity" about what the British-born chief executive has achieved in 18 to 24 months.
"I don’t think his position is at risk,'' Mr. Riesselmannn said. "He is cleaning up at the beginning of his term, something you see often – radical measures to start with a clean slate.”
The bank's loss in the fourth quarter, which followed an even bigger €6 billion loss in the third quarter, was generated again by legal expenses and the costs of restructuring its private clients business.
Jernej Omahen, an analyst at Goldman Sachs, said he didn’t expect this would be the end of Deutsche Bank’s legal costs. He expects more costs from settlements to weigh on profits for several years.
One costly probe could be an investigation into €10 billion in suspicious trades between its Moscow and London offices that may have let Russian clients launder money and evade U.S. financial sanctions in the wake of Russia's seizure of the Crimea from Ukraine.
Andrew Cooms, an analyst at Citibank, said he expected one-time costs of €3.6 billion this year alone. The legal fees are leading some to worry that Deutsche Bank may be forced to raise money in another capital increase.
“If the environment remains difficult, the concerns about the capital base could re-emerge and even increase,” Exane BNP said in an analyst note.
What we are seeing on the stock market is a withdrawal of confidence. Capital markets are asking themselves, how much longer this shrinking down to health will continue. Ingo Speich, Fund manager, Union Investment
Mr. Cryan is certainly starting his tenure with the bad news.
In 2014, before he arrived, Deutsche Bank reported a €1.7 billion net profit, including a €441 million net profit in the fourth quarter.
The bank said it plans to release more details next Thursday, and described the €6.7 billion figure and others as "preliminary.'' In the fourth quarter of 2015, results were weighed down by €800 million in restructuring costs and severance charges related to the downsizing of its retail banking division, as well as €1.2 billion in legal expenses.
Those costs are likely to continue eating up the bank’s profits in 2016. Deutsche Bank is in the middle of a deep restructuring of its operations. The bank has said it will book about €3 billion to €3.5 billion in restructuring costs over the coming years.
But perhaps more worrying than the one-time costs was the fact that the bank posted a small operating loss as well. Deutsche Bank said "challenging market conditions" also contributed to the loss, eroding profits from investment banking.
"Even if you take out the one-time costs, there remains by my calculations a loss in the fourth quarter. That is disappointing in my view," Jochen Schmitt of Germany's Metzler bank told Handelsblatt Global Edition.
To be sure, the bank was hardly alone in its struggles last year. Investment banks as a whole saw an 8-percent drop in fees over the year, according to an annual survey by Thomson Reuters. But the German bank has taken more hits than any other globally-active bank, leaving investors to doubt the bank has any real growth prospects left.
Thomson Reuters found that fees from investment banking fell 20 percent last year and that the German bank lost 0.6 percent of its market share to other global banks.
Deutsche Bank reported revenues of €33.5 billion, up from €32 billion in 2014. The bank reported a €6-billion loss in the third quarter after special items as it wrote down the value of several assets and businesses on its books.
In its statement, the bank did not say why it set aside more legal provisions in the fourth quarter. Deutsche Bank is still struggling with the legacy of excess in the run-up to the 2008 financial crisis and is involved in thousands of lawsuits and several investigations.
Deutsche Bank's share price has plunged over the last few months as Mr. Cryan downsized the bank, closing major divisions and cutting across the board. About 9,000 full-time staff and 6,000 part-timers are being let go. Postbank, a retail banking subsidiary with some 20,000 employees, will be sold or spun off.
The bank stressed its latest financial results, including the legal charges, were estimates and could change. Deutsche Bank's full annual report will be released in March. Mr. Cryan will give a press conference to present more details on January 28.
“He will be judged by future results but we don’t expect strong improvements in the next few quarters,'' said Mr. Riesselmann of Independent Research. "It will take time. The supervisory board will have this patience.”
Kevin O'Brien is the editor in chief of Handelsblatt Global Edition. Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin, focusing on the financial markets. Gilbert Kreijger of Handelsblatt Global Edition and Martin Dowideit of Handelsblatt contributed to this story. To contact the authors: [email protected], [email protected] and [email protected]