* Second quarter pretax 792 mln euros vs 1.3 bln poll
* Legal provisions hiked by 630 mln euros
* Bank to cut assets to keep leverage ratio at 3 pct
(Adds CFO comment)
By Edward Taylor and Arno Schuetze
FRANKFURT, July 30 Deutsche Bank AG
warned on Tuesday it will face hundreds of millions of euros in
costs for litigation and compliance with new bank rules after
reporting weaker-than-expected second quarter earnings.
The new regulatory costs follow a push by bank watchdogs to
make global lenders beef up capital or cut their balance sheets
to reduce risk. This will force Germany's flagship bank to
earmark an additional 250 billion euros ($331.34 billion) in
assets which can be cut, a move which will reduce revenues.
Shedding these assets could result in 600 million euros
worth of one-off costs and 300 million euros in missed pretax
profit, the bank said.
"We are committed to further reducing (the) balance sheet in
a manner that enables us to meet requirements on (the) leverage
ratio," Co-Chief Executives Juergen Fitschen and Anshu Jain said
in a joint statement.
Regulators are keen on using the leverage ratio to gauge a
bank's strength. This compares a bank's shareholder equity to
its total assets without using a bank's own risk weightings.
Deutsche said it will seek to achieve a leverage ratio of 3
percent under the more stringent bank safety rules after
regulators questioned the bank's ability to absorb financial
shocks in a possible future crisis.
The Frankfurt-based group also has raft of legal costs
related to the sale of residential mortgage-backed securities,
allegations it manipulated global benchmark interest rates and a
dispute with the representatives of deceased media magnate Leo
"We expect settlements to accelerate in the coming
quarters," Jain said, without elaborating on which legal issues
were on track to be resolved. The majority of legal issues
relate to business from the investment bank, Deutsche said.
In the second quarter, litigation provisions were 630
Germany's flagship lender posted an 18 percent fall in
second-quarter pretax profit to 792 million euros, well below
the 1.3 billion forecast by analysts in a Reuters poll.
Revenues from sales and trading of debt and other products
fell 11 percent year-on-year, leading some analysts to question
Deutsche's earnings prowess in fixed income, an area which was
often a key driver of earnings for the bank.
FIXED INCOME "PEARL"
Philipp Haessler bank analyst at Equinet said, "The fixed
income pearl has not lost its lustre but it didn't perform as
well in Europe as it did in the U.S., where U.S. peers are
So far this reporting season, investment banking rivals like
Morgan Stanley, Goldman Sachs, JPMorgan Chase &
Co, and Bank of America Corp have beat analysts'
profit expectations, thanks largely to strength in trading and
Co-chief executive Jain insisted the bank had not lost its
competitive edge. "Deutsche Bank is on course despite continued
headwinds we face," Jain told analysts.
Deutsche Bank expects its asset reduction programme to be
completed by 2015, Chief Financial Officer Stefan Krause said.
Around 3.3 billion euros worth of assets had already been
reduced by changing the risk model on some of the assets in its
The bank had already raised capital in April to bolster its
finances. But since then one of the top U.S. regulators, Thomas
Hoenig, Federal Deposit Insurance Corp vice chairman, called
Deutsche Bank "horribly undercapitalized."
Deutsche's shares fell 3.6 percent, making it the biggest
faller among European banks after Barclays, which fell
sharply after announcing a share issue.
Since June 1, 2012 when Deutsche's new leadership took over,
the bank's share price has risen 32 percent, but has lagged key
peers and the STOXX Europe 600 banking sector, which has
jumped 47 percent.
By contrast, JP Morgan shares have gained 63 percent and UBS
58 percent, Thomson Reuters data show. link.reuters.com/kag99t.
($1 = 0.7545 euros)
(Editing by David Holmes and Jane Merriman)