Germany's biggest lender Deutsche Bank on Thursday reported a €1.9 billion ($2.1 billion) net loss in the fourth quarter, weighed down by heavy litigation costs and the scaling back of its investment banking activities, which saw it lose out on a fourth-quarter market rally.
The results disappointed analysts who had estimated the bank to fall short of €1.3 billion, according to a poll by news agency Bloomberg. Last year, the bank made a €2.1 billion loss in the same period. The bank's full year loss came in at €1.4 billion, compared with a record loss of €6.8 billion in 2015, also due to high litigation charges and restructuring costs.
The bank's shares dropped as much as 7.1 percent in Frankfurt and traded 5.3 percent lower at €18.05 by 3:40 P.M. local time, making Deutsche Bank the biggest decliner in the German blue-chip index DAX, which was down 0.2 percent on Thursday afternoon.
Deutsche Bank was not able to maintain the profit-oriented momentum of last year's first three quarters. It had to take a €1.6 billion pretax charge for litigation costs and a €1 billion writedown on its British insurer Abbey Life, which it sold last year.
The lender in December agreed to pay $7.2 billion to settle a U.S. investigation into its sale of mortgages and mortgage securities. Deutsche Bank was also entangled in a money laundering scandal in Russia and at the start of this week reached a $630 million settlement with U.S. and British authorities on the matter.
If you want to bring in a good harvest, you must first sow, and this takes time. John Cryan, CEO, Deutsche Bank
Ever since becoming chief executive in July 2015, John Cryan has made it a top priority to agree on settlements to improve the bank's long term earnings and remove financial risks, mostly resulting from investment banking operations carried out before the financial crisis of 2008-2009.
Uncertainty over the size of the settlements pushed the shares below the level of €10 last year and even led to speculation in September that Deutsche Bank might need state aid – a rumor the bank denied.
"Let me be frank: we are certainly also not satisfied with these numbers," Mr. Cryan told journalists at a news conference presenting the results. "Of course we target being a profitable bank."
Deutsche Bank's Chief Financial Officer Marcus Schenck declined to comment on whether the lender intended to increase capital in form of an accelerated bookbuild following the high settlement expenses. "Accelerated book building is something you have to make public and we haven’t announced one today," Mr. Schenck said after being pressed by journalists.
Investors are keen to hear whether the bank plans on hiking its capital. "This very much depends on the outcome of the Basel IV talks. If there is a high floor, let's say at 75%, there is a high probability that the bank needs also external capital," Berenberg analyst James Chappell told Handelsblatt, referring to an international agreement on new capital rules.
In a conference call with analysts Mr. Schenck said it would be good to finally get clarity on the outcome of the new Basel regulations, even if an agreement should ultimately fail. "I still think it’s more likely that we will get some conclusion from the committee," the CFO said. "In terms of what it means in numbers, it will probably represents about a €100 billion increase, as we’ve said before," he added, referring to an increase in risk-weighted assets through 2019.
Sources last month told Handelsblatt that Mr. Cryan has decided to hold off any major strategy announcements until international negotiators reach the outlines of Basel IV.
We clearly think we need to and can be more aggressive on the cost side. Marcus Schenck, Deutsche Bank's Chief Financial Officer
"Our expectation will be that we will be profitable this year, that is our intention," the CEO said, adding that the bank also wanted to return to paying a dividend, but that it was too early to say when that goal would be reached. "If you want to bring in a good harvest, you must first sow, and this takes time," Mr. Cryan said. "We are laying the foundations today so that we can be a successful bank tomorrow and our efforts are bearing fruit."
Pressed by journalists over whether the bank would implement further changes in going forward, Mr. Cryan said that the bank's strategy wouldn't "fundamentally change." He said the bank only planned to introduce minor adjustments, but declined to elaborate on details.
Deutsche Bank's finance chief said that more could be done to improve the lender's cost side. "We clearly think we need to and can be more aggressive on that side and that’s why we put in place a qualified hiring freeze," Mr. Schenck said during the analyst call. "That cost save will give us quite an uplift," he added.
In the fourth quarter of 2016, Deutsche Bank hiked its litigation reserves by 29 percent to €7.6 billion from €5.9 billion in the previous quarter, an analyst presentation on Thursday showed. It also increased provisions for possible future legal challenges by 38 percent to €2.2 billion.
"Whilst 2015 and 2016 were peak years for litigation, 2017 continues to be burdened by resolving legacy matters," Deutsche Bank said in the presentation.
While other Wall Street banks benefited from increased trading activities, particularly at the end of the year following the election of U.S. President Donald Trump, Deutsche Bank fell short of its peers in profiting from the surge.
According to Bloomberg, the 5 biggest U.S. investment banks saw their combined debt trading revenue hike by 43 percent in the fourth quarter, compared to the year prior. Deutsche Bank's trading department reported a fourth-quarter pretax loss of €737 million, however. The lender had previously implemented sharp cuts at its investment banking unit to improve internal controls following a series of scandals.
Bankers at the German flagship lender are set to feel the shortfall in their personal wallets: expenses for salaries and bonus payments were cut by €1.1 billion to €11.7 billion in 2016, the bank said in the analyst presentation. At Thursday's press conference, Mr. Cryan declined to disclose the precise figure for bonus payments, adding that these would only be revealed in the bank's final full-year statement, due on March 17.
Mr. Cryan said that 2016 bonuses were only paid out to "a relatively small number of people in absolutely critical positions to make them stay with the bank."
Sources on Wednesday told Handelsblatt that Deutsche Bank's supervisory board was working on an overhaul of the bonus payment system for executives, with shareholders striking down a previous draft at the lender's last year annual general meeting.
Tina Bellon is an editor with Handelsblatt Global. Yasmin Osman, a senior financial editor for Handelsblatt in Frankfurt and the paper’s lead reporter on Deutsche Bank, contributed to this article. To contact the author: [email protected]