Deutsche Bank Profiting From Chaos

Germany's largest bank surprised investors on Thursday by posting a fourth-quarter profit as its investment bankers earned money off Europe's ongoing debt crisis and the falling value of the euro.
Deutsche Bank's co-CEO's can breath a sigh of relief - for now.

The euro zone’s debt crisis has paid off for Deutsche Bank in a big way – at least for one quarter.

Deutsche Bank’s shares rose more than 3 percent on Thursday as Germany’s largest bank posted a surprise fourth-quarter profit of €441 million ($498 million), helped in part by its investment banking team making the right bets on Europe’s economy - and especially on what the European Central Bank would do about it.

The bank, which has struggled mightily to turn a profit over the last year and is in the middle of a major strategic review of its businesses, said it was “encouraged” by the results it has seen over the final three months of the year, which compared to a €1.4 billion loss in the fourth quarter of 2013.

For the year, the bank said it earned a profit of €1.7 billion, up from €0.7 billion in 2013, but still well below the profits seen by many of its U.S. peers. JP Morgan, for example, posted a record $22 billion profit for the whole of 2014.

Above all there was a solid trading environment, under the star of quantitative easing in Europe. Deutsche Bank apparently took advantage of this opportunity. Guido Hoymann, Banking analyst, Bankhaus Metzler

“While we are encouraged by many of our full-year and fourth-quarter business results, we are working hard to manage our cost base, maintain our capital strength and increase our returns to shareholders,” Deutsche Bank’s co-chief executives Anshu Jain and Jürgen Fitschen said in a joint statement accompanying the results.

Above all, it was Deutsche Bank’s core investment banking unit – an area that Mr. Jain hopes to expand – that contributed to the positive result. This was not a given, after a series of U.S. investment banks posted mostly disappointing results for the final quarter. Deutsche Bank, by contrast, said it turned a €516 million profit in investment banking, up from €132 million in the same period one year ago.

This likely had to do with making the right bet on the European Central Bank, which in January announced it would launch an historic and massive €1.1-trillion bond-buying program, known as quantitative easing. The move pushed up the prices of stocks and bonds throughout Europe, and pushed down the value of the euro. All a bank had to do was make the right moves on the market, something that is easier said than done.

“Above all, there was a solid trading environment, under the star of quantitative easing in Europe. Those who took the right bet ahead of it could in fact earn a lot of money,” said Guido Hoymann, a banking analyst with German private bank Bankhaus Metzler. “Deutsche Bank apparently took advantage of this opportunity.”

Deutsche Bank Back in Black-01


While any bank could have profited from quantitative easing by making the right bets, Mr. Hoymann said the European banks likely profited more than most. U.S. banks would have had to deal with a falling euro, which has dropped sharply against the dollar, as the Frankfurt-based ECB has taken more and more drastic steps to push down interest rates in Europe.

“This time it was in fact a European topic – QE – that was good for trading," Mr. Hoymann said. "U.S. banks have presumably positioned themselves accordingly, but they had to account for the negative effect of the euro’s devaluation.”

Mr. Jain, in a conference call with analysts, said it seemed likely that the bank had gained market share in its fixed income business as a result of its good performance, though he couldn't offer specific numbers. "In some ways, the macro-economic uncertainty we are seeing has always played well with Deutsche Bank," he said.

Revenue from fixed-income trading rose 7 percent on the quarter, Mr. Jain said. Many other banks, especially in the United States, saw revenues fall over the same period.

But this positive effect from the ECB's quantitative easing announcement is only temporary, Mr. Hoymann noted. It marked a one-time chance to bet big on the central bank moving forward with a controversial policy that, just a few months ago, was far from certain. Mr. Jain also warned that, over the long term, the ECB's policies will have a negative effect on banks' traditional business of lending money to consumers and businesses. Low interest rates mean banks can't profit as much as they'd like from giving out loans.

These numbers have bought a little time for the bank to present its new strategy in the second quarter. Dieter Hein, Banking analyst, Fairesearch

The bank’s overall legal situation has also improved. Dogged by thousands of lawsuits and a series of investigations into its trading practices by regulators, Deutsche Bank suggested it may have turned a corner. The bank set aside only €200 million for additional legal expenses in the final three months of 2014.

Deutsche Bank had already booked about €3 billion for pending litigation. Since Mr. Fitschen and Mr. Jain came into office, the bank has paid out about €4.5 billion in legal settlements.

Deutsche Bank’s shares rose more than 3 percent in pre-trading Thursday morning, and remained up 2.8 percent at €25.555 at 11:20 CET on Thursday. Shares are still down nearly 25 percent over the past year.

But it was not all good news for Deutsche Bank. Its traditional lending business in particular had another weak quarter, posting a profit of €55 million, about three-quarters less than a year earlier. A German court decision that allowed customers to reclaim illegal administrative fees on loans weighed heavily on the bottom line, costing the bank €330 million.

Dieter Hein, a banking analyst with Fairresearch, noted that the bank still has very high costs compared to many of its peers, and has continued to miss most of the targets for profitability that were set by co-CEOs Mr. Jain and Mr. Fitschen when they came into office in 2012.

A case in point is the bank’s return on equity – a measure of how much the bank earns compared to its costs. Return on equity stood at 2.7 percent on average in 2014, well below a target of 12 percent that was set by the bank back in 2012.

“Deutsche Bank is still earning much too little compared to its equity capital,” Mr. Hein told Handelsblatt Global Edition. “But these numbers have bought a little time for the bank to present its new strategy in the second quarter.”

Deutsche Bank flatly refused to comment on its strategic overhaul when it presented its annual results on Thursday. The bank had cancelled its initial plans to hold an in-person press conference at the start of this year, and has said only that it will announce the results of its strategic overhaul in the second quarter of this year.

Many banks in Germany have struggled to profit from traditional lending as the European Central Bank has pushed interest rates across the continent to record lows. Speculation is rife that Deutsche Bank is preparing to shed major parts of its retail banking business, including possibly selling or spinning off its retail subsidiary, Postbank.

Stefan Krause, Deutsche Bank's chief financial officer, refused to comment on any rumors, but insisted the bank was still capable of making money in its private client business.

"We do have a profitable franchise," he told analysts in a conference call. "It’s not an issue of not making money in Germany."


Christopher Cermak has covered economic and financial topics in Frankfurt and Washington DC. He is now an editor with the Handelsblatt Global Edition in Berlin. To contact the author: [email protected]