(BN) Deutsche Bank Profit Rises on Trading Gains; Loan Losses Climb

By Aaron Kirchfeld and Jann Bettinga
July 28 (Bloomberg) -- Deutsche Bank AG, Germany’s biggest bank, said second-quarter profit rose 68 percent as increased revenue from trading bonds and stocks offset a surge in loan- loss provisions.
Deutsche Bank fell as much as 7.2 percent in Frankfurt trading as the company set aside 1 billion euros ($1.4 billion) for risky loans, more than the 634 million-euro estimate of analysts surveyed by Bloomberg. Net income rose to 1.09 billion euros, the Frankfurt-based bank said in a statement today.
Chief Executive Officer Josef Ackermann said in a letter to shareholders he remains "cautious" on the economic outlook, and the bank predicted a further increase in private and corporate insolvencies. A fourfold gain in income from debt sales and an improvement in equity trading in the second quarter countered a slump in profit at the consumer banking unit and wider-than-estimated loss in asset management.
"Deutsche Bank had to significantly increase loan-loss provisions because of the worsening economy, and it won’t get better anytime soon," said Lutz Roehmeyer, who helps manage about $15.5 billion at Landesbank Berlin Investment in Berlin, including Deutsche Bank shares. "The investment bank generated a lot of revenue thanks to the boom in corporate bond sales, but retail banking, asset and wealth management and transaction banking really lost out."
Deutsche Bank fell 2.68 euros, or 5.2 percent, to 49.35 euros by 9:39 a.m. in Frankfurt, reducing the gain this year to
77 percent. The bank is the sixth-biggest gainer on the index of
63 European financial companies this year.

Debt and Equity

The investment bank, run by Anshu Jain and Michael Cohrs, posted pretax profit of 828 million euros after a loss a year earlier. Analysts estimated earnings of 1.08 billion euros.
The company’s global markets business, run by Jain, had debt trading income of 2.6 billion euros on credit, interest- rate and currency sales, below analysts’ estimates. Equity trading generated 903 million euros in revenue, the most in six quarters and more than analysts predicted.
Credit Suisse Group AG of Zurich and New York-based Goldman Sachs Group Inc. and JPMorgan Chase & Co. also generated higher trading income in the past quarter.
"The bond business is definitely a revenue driver at the moment, and we’ve seen that banks are earning a lot from that,"
said Daniel Hupfer, who helps manage about $42 billion, including Deutsche Bank shares, at M.M. Warburg in Hamburg.
The asset and wealth management business reported a pretax loss of 85 million euros, a bigger deficit than analysts estimated, compared with a year-earlier profit. Earnings at the consumer bank fell 83 percent to 55 million euros.

Progress in Economy

The bank posted a second straight quarterly profit after reporting its first annual loss in more than 50 years in 2008 amid the worst financial crisis since the Great Depression. In the second quarter, sales of corporate debt in Europe rose 12 percent from a year earlier to 329 billion euros, data compiled by Bloomberg show.
"The outlook for the remainder of 2009 is strongly influenced by progress in the global economy," Ackermann, 61, said in the statement. "In an uncertain environment, Deutsche Bank is well prepared," and can take "full advantage of opportunities, as and when business conditions improve," he said.
The bank incurred 1.4 billion euros in charges, including provisions for credit losses, legal costs related to the failed buyout of Huntsman Corp. and severance payments. Total loan-loss provisions at the bank rose to 1 billion euros from 135 million euros in the year-earlier period, almost matching the amount set aside for possible defaults in all of 2008.

Capital Ratio Rises

Earnings were boosted by 377 million euros in pretax profit at the corporate investments unit, including gains from derivatives related to the acquisition of Deutsche Postbank AG shares and stake sales in companies such as Daimler AG and Linde AG. The bank paid 242 million euros in income taxes, down from
633 million euros in the first quarter, helped by tax-exempt asset disposals.
Ackermann had his contract extended by three years to 2013 in April after guiding Deutsche Bank through the financial crisis without taking government aid. He boosted the bank’s tier
1 capital ratio, a measure of solvency closely watched by regulators, to 11 percent in the second quarter. He lowered the bank’s leverage ratio -- total assets divided by shareholder equity, using U.S. accounting principles for derivatives -- to 24 times by the end of June from 38 times a year earlier.
Non-interest expenses rose 21 percent to 5.6 billion euros in the quarter, boosted by a 17 percent jump in compensation and benefits to 3.14 billion euros as the company set aside more money for bonuses.
Earnings at the asset and wealth management business, headed by Kevin Parker and Pierre de Weck, suffered from declining asset values, client withdrawals at the asset management unit and charges related to a property fund. Earnings at the retail bank were hurt by rising loan provisions and severance charges tied to job cuts. Pretax profit from global transaction banking fell 36 percent to 181 million euros.
Ackermann has built up those so-called stable businesses to decrease the company’s reliance on investment banking. The investment bank, known as corporate banking and securities, generated 59 percent of total revenue in the quarter.