Deutsche bank....
- JULY 28, 2009, 6:43 A.M. ET
2nd UPDATE: Deutsche Bank 2Q Net Pft +68%; Loan Provisions Up
(Adds detail on provisions and analyst comment.)
By William Launder and Madeleine Nissen
Of DOW JONES NEWSWIRES
FRANKFURT (Dow Jones)--Deutsche Bank AG (DB) Tuesday posted a better-than-forecast rise in net profit, as it became the latest global financial giant to get a boost from its investment banking operations, but the deteriorating economy forced it to sharply increase provisions for bad loans and its asset quality remained worrisome.
Germany's largest bank by market capitalization, said net profit surged 68% to EUR1.09 billion up from EUR649 million a year earlier, helped by a return to a profit in its trading results after a loss a year earlier. The net profit beat analyst expectations of EUR955 million.
However, bad-loan provisions rose to EUR1 billion from EUR135 million a year earlier, helping to push the shares down. At 1017 GMT, they were off EUR4.30, or 8.3%, at EUR47.75, while the German market was down 0.1%.
Included in the bad-loan provision were EUR433 million in charges on two unamed counterparties. The provision for bad loans in Deutsche Bank's private and business clients segment increased 51% to EUR217 million in large part because of deterioration to the bank's loan book in Spain's ailing economy.
"The biggest concern now is the loan book," Dirk Becker of Kepler Capital Markets wrote. "Considering that we are all still in the recession, this could lead to further problems in the coming quarters."
Deutsche Bank, which has weathered the financial crisis better than other major German banks, didn't provide an outlook for the full year. Chief Executive Josef Ackermann did say, however, that the bank's business model positioned it well to "take full advantage of opportunities, as and when business conditions improve."
Still, the nature of the profit rise disappointed some analysts. The gain was largely driven by EUR2.61 billion in trading profit, which benefited in particular from growth in interest-rate trading, money markets and debt trading in emerging markets. Analysts often see trading profit as less stable, given the potential turbulence in markets.
Analysts had expected a EUR1.9 billion trading profit, after a EUR475 million trading loss a year earlier.
The trading gains were offset by EUR1.4 billion in "specific charges," including legal settlements and severance payments.
Markdowns fell significantly to EUR108 million during the quarter from EUR2.1 billion in the year-ago period, in part as Deutsche Bank benefited from an easing of accounting standards.
Despite the drop in write-downs, Deutsche Bank remains burdened by so-called "level 3 assets," the value of which is based on management assumptions and can't be determined using market prices or risk models. Level 3 assets totaled EUR64 billion at the end of the quarter, even after a 20% reduction from the end of the first quarter.
"These are adequate results, but after the U.S. investment banks and Credit Suisse have reported they are not a great surprise," Helvea analyst Peter Thorne wrote. The net profit was helped by EUR234 million in gains on derivative trades linked to Deutsche Bank's stake buy in Deutsche Postbank AG (DPB.XE), Thorne noted.
After accounting for a number of capital gains, impairments and other charges, Kepler analyst Becker said he considered the earnings below expectations. "We believe Deutsche Bank has now run its course after almost reaching book value," he wrote, placing his buy rating under review.
Net commission income for the quarter was EUR2.24 billion, down from EUR2.56 billion but beating analyst expectations of EUR2.14 billion. Net interest income fell to EUR2.76 billion from EUR2.95 billion and was below analyst expectations of EUR3.35 billion.
Although profits were driven by investment banking, CEO Ackermann reiterated that the bank continued taking steps to limit risks and shore up its capital and liquidity.
Deutsche Bank's balance sheet has been reduced 31% since the end of June 2008, as calculated using U.S. generally accepted accounting principles, it said.
The Tier 1 capital ratio, which analysts consider a key indicator of a bank's health, increased to 11% in the quarter from 9.3% a year earlier. Return on equity, or the amount of net profit returned as a percentage of shareholders equity, increased to 12.8% from 7.6%.
Deutsche Bank has raised about 80% of its total EUR16 billion in funding for the year, it said.
Revenue for the quarter rose to EUR7.94 billion from EUR5.43 billion. Pretax profit jumped to EUR1.32 billion from EUR642 million
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