Deutsche Bank tumbles, warns of 2014 headwinds
Amid a high-profile currency manipulation probe and following a surprise quarterly loss, Deutsche Bank warned it expected further headwinds in the coming months as litigation and new regulation take their toll.
Shares of Deutsche Bank closed 5.4 percent on Monday after the bank reported a pre-tax loss of 1.153 billion euros ($1.56 billion) for the fourth quarter of 2013 on Sunday, due to heavy litigation costs, restructuring and balance sheet reduction. Litigation expenses cost 528 million euros in the quarter while adjustments to the value of credit, debt and funding produced another 623 million euros in costs, and restructuring costs added a 509 billion euro burden.
Chief Financial Officer Stefan Krause, speaking on a conference call with analysts on Monday and cited by Reuters, said that the bank's litigation reserves contained no provisions for an investigation into alleged foreign exchange manipulation at the bank. He added that the bank was actively reviewing its foreign exchange business for potential wrongdoing.
Co-Chief Executive Anshu Jain said 2014 would be a turning point for "legacy issues"the bank is dealing with, adding that it was too early to comment on the bank's forthcoming first quarter performance. A decision on the 2013 dividend was still to be made, Jain added.
Despite Sunday's unexpected announcement, analysts were confident the bank would bounce back in the long term.
"2014 will be very difficult and will be very similar to 2013 [for the bank]," Dirk Becker, deputy head of German research at broker Kepler Cheuvreux, told CNBC on Monday. 2015, however, presented a rosier picture.
Becker said he was not surprised by the losses and that the market should not be either. "They [Deutsche Bank] always said there would be more litigation and restructuring costs...But I don't think the shares should sell off today because all these burdens had been broadly expected by the market and it's probably better to put them in the 2013 results."
Research analysts at Credit Suisse were also confident that the bank's share price would be resilient, remarking in a note on Monday that "given the shares are up circa 20 percent since mid-December we expect them to be weaker on this announcement, but longer term we see the recent positive changes to the leverage ratio as more important."
The losses come at the end of a turbulent year in which regulatory and legal issues have troubled the bank. In October, the bank posted a 98 percent drop in quarterly pre-tax profit to 18 million euros ($24.81 million) on the back of falling trading income fell and rising litigation provisions.
The group's Co-Chief Executive Officers said that while legacy issues had impacted the results, underlying core business profitability "was amongst the highest of the past decade."
"We have made Deutsche Bank fitter, safer and better balanced. We expect 2014 to be a year of further challenges and disciplined implementation; however, we are confident of reaching our 2015 targets and delivering on our strategic vision for Deutsche Bank," they remarked in the bank's earnings statement.
German magazine Der Spiegel reported on Sunday that Germany's banking watchdog Bafin plans to intensify its probe into possible manipulation of benchmark foreign exchange rates at the bank.
The news comes a week after the bank suspended several currency traders in New York as part of an internal probe into the alleged manipulation of global currency markets.
Remarking on the bank's outlook, Kinner Lakhani, head of banking research at Citigroup, said it was still a good investment for the "patient investor."
The weak [fourth quarter] results represent further management actions to "clean-up" the balance sheet, he said.
Such moves by European banks to clean up their balance sheets come ahead of global banking regulations to introduce leverage ratio rules, requiring banks to hold a certain amount of capital, in order to avert any future banking crises.
Becker agreed that the bank was "relatively radically" cutting down its balance sheet exposures to comply with the upcoming leverage ratio (the exact level of which is still unknown. "They have said that it would cost them around 600 million euro to adjust the balance sheet and I think what we've seen in the fourth quarter is part of this."
He too was sanguine about the bank's outlook.
"After 2014 they should have dealt with all this stuff and I believe that Deutsche Bank in 2015 can be a bank that generates between 4 and 5 euros earnings per share (EPS) and can pay around 2 euros dividend. I think at some point in 2014 this will be priced in."