Even positive surprises don’t appear to be welcome at Deutsche Bank these days.
For weeks, most analysts had been predicting losses in the hundreds of millions for the bank in the fourth quarter. But Germany’s largest financial institution on Thursday surprised them with a profit before taxes of €253 million, or $285 million, and net income after taxes of €441 million. The news sent the stock price up almost three percent, to the joy of the bank’s otherwise beleaguered shareholders.
But there could be a hangover to the party. Germany’s Federal Financial Supervisory Authority, BaFin, signaled to Handelsblatt that it would be investigating the situation. It wants to examine whether or not the bank should have communicated the numbers in advance – analysts had calculated that the bank would book losses at almost the same level of its now achieved profits.
Under German law, a company should warn investors ahead of time if it knows that earnings are going to fall more than 10 percent outside of the market’s expectations. They can do this by issuing an ‘ad-hoc’ statement, or a profit warning. Unlike in many other countries, such a statement can be issued at any time – not just when stock markets are open. If a company’s earnings fall too far outside of expectations, it is common practice for Germany’s regulators to examine whether they may have violated the rules.
But there is an academic argument to cover Deutsche Bank’s actions. Events not publicly known do not always require ad-hoc disclosures, even if they positively affect the share price, according Andreas Cahn, the executive director of the Institute for Law and Finance at the Johann Wolfgang Goethe University in Frankfurt. If the date for the quarterly financial statement is immediately pending, the interest of the company, as a rule, supersedes the demands of the capital market in the immediate release of the information, he said.
Michael Seufert, an analyst at NordLB, also miscalculated the banks earnings. But he was relaxed about it, saying a company can occasionally surprise on the positive side. The analysts were primarily wrong about the legal costs. The bank set aside only €200 million in additional funds in the quarter for litigation – many had expected this amount would be much larger.
Deutsche Bank’s chief financial officer, Stefan Krause, said the low legal provisions were partly because of doubts about what kind of fines it can expect from regulators. The bank faces potential fines in the United States for its role in a global banking scandal involving the manipulation of benchmark market indicators governing currencies and interest rates. Other investment banks that played a more central role are expected to be fined first, and Mr. Krause said he had yet to get a clear indication of other banks’ penalties in the time period from October through December. That was why the legal provisions were only moderately increased by €3.2 billion, he said.
In the three years since Mr. Jain and Mr. Fitschen took over as co-CEOs, it has become clear that investment banking, for which Mr. Jain has long been responsible, is driving Deutsche Bank's earnings.
“That is credible,” said Mr. Seufert. “It is hard to give a reliable indication of the legal costs,” he added, noting the deviation between the analysts’ predictions and the actual results. Mr. Krause made it clear, however, that the legal costs have only been put off.
The quarterly figures on Thursday also stoked a long-running debate about the bank’s future strategy, and whether the bank should double-down on investment banking or put more effort into its traditional business of lending to customers. While the bank’s co-chief executive Anshu Jain concentrated on the bank’s success in investment banking, Rainer Neske, head of the private and business clients division, emphasize his progress in turning around the German lending business.
“We are showing rising earnings. That means: We are growing,” he wrote in an internal email to his employees, which was made available to Handelsblatt.
Results of the bank’s strategic review will probably be announced in June. Mr. Neske is already going on the offensive.
Over the past few weeks, speculation has been going around that the Deutsche’s retail banking unit, Postbank, could be sold or publicly listed, which would diminish Mr. Neske’s power. He wrote in the email to his employees that he was aware “that the media coverage about that would lead to a feeling of insecurity for many of you.”
Ironically, it was a one-time charge in the fourth quarter, caused by a court-ordered refund of credit fees, that pushed the bank’s business in Germany into the red. The pre-tax profits for Mr. Neske’s entire private and commercial lending division were only rescued by business from abroad, but overall profits were down to €55 million after €218 million in the same period last year.
Adjusted for the one-time charge, the quarterly results came in at €597 million, which would have conveyed “a realistic picture of our operating strength,” according to Mr. Neske.
In the three years since Mr. Jain and Jürgen Fitschen took over as co-CEOs, it has become clear that investment banking, for which Mr. Jain has long been responsible, is driving Deutsche’s earnings. From 2012 to 2014, the pre-tax earnings from capital market operations were €9.3 billion. Earnings from private banking were not even half as much, at €4.4 billion. However, the picture is distorted by the fact that many bad loans on the investment banking side have been outsourced to an internal “bad bank.” The “Non-Core Assets” unit has assets on its books worth about €40 billion, only €7.5 billion of which are attributable to private banking.
Another burden for the bank last year was a bank levy being imposed by German regulators since the 2008 financial crisis, which had an impact of €342 million. For 2015, several hundred million more is expected, this time from a European-wide bank levy that will be due for the first time, said Mr. Krause.
Co-chief executive Mr. Fitschen got the staff prepared for hard times – regardless of the new strategy: “Especially when it comes to cost discipline and returns, we are still far from where we want to be.”