January 21, 2014 / 3:26 PM / 4 years ago

Fitch: Deutsche Bank's Weak 4Q13 Results Point to Challenging 2014

(The following statement was released by the rating agency) MILAN/LONDON, January 21 (Fitch) Fitch Ratings says that Deutsche Bank AG’s (A+/Stable/a) reported EUR1.2bn pre-tax loss and low underlying earnings performance in 4Q13 demonstrate that the bank needs to achieve its planned cost and revenue goals to boost operating performance and stay in line with its global trading and universal bank peers. Deutsche Bank’s ‘a’ Viability Rating is based on Fitch’s expectation that the bank will manage to improve its underlying performance and maintain sound capitalisation, both on a risk-weighted and leverage basis. Any sign that it will not manage to materially improve performance would put pressure on the rating. We expect 2014 to remain a challenging year for underlying operating profitability as Deutsche Bank expects to incur additional restructuring costs, but reduced underlying operating expenses should help performance stabilise. Excluding a EUR623m loss related to debt, credit and funding valuation adjustments (dva, cva and fva) the bank made a EUR530m pre-tax loss in 4Q13 caused by EUR528m provisions for litigation risk, EUR509m costs related to the bank’s strategic plan and a 16% drop in net revenue, primarily because of lower revenue from its corporate banking and securities (CB&S) businesses. For FY13, Deutsche Bank generated EUR2.8bn adjusted pre-tax profit net of a EUR650m loss related to cva/dva/fva and a small EUR79m impairment of goodwill and other intangible assets. This compares with a EUR2.3bn pre-tax profit adjusted for the same items in FY12. Pre-tax profit in the past two years was affected by sizeable provisions for litigation risk, amounting to about EUR2.5bn in FY13, marginally higher than in the previous year. Fitch believes that Deutsche Bank remains exposed to litigation and other conduct risk. At end-2013, the bank had EUR2.3bn litigation reserves, about EUR1.8bn lower than at end-3Q13 as the bank settled two cases in 4Q13. Contingent liabilities related to litigation, where the bank can estimate the outcome, but it is less than probable, remained stable at EUR1.3bn. Deutsche Bank’s strategic plan announced in September 2012 included ambitious cost-cutting targets, aiming at cumulative cost savings of EUR4.5bn by 2015. The bank announced that it achieved EUR1.7bn cost savings in FY13 and incurred EUR1.3bn costs to achieve these savings. The announced cost savings are gross of increased costs in other areas, including regulatory and compliance costs, but overall Fitch expects the bank to improve its cost efficiency. In 2014, the bank expects to incur additional restructuring costs as total costs to achieve the strategic plan targets were expected at EUR4bn, but net cost savings in 2014 should start to increase and help the bank improve efficiency. Despite the 4Q13 loss, Deutsche Bank’s Basel III fully-applied common equity Tier 1 (CET1) ratio remained stable at 9.7%, as risk-weighted assets (RWAs) reduced by EUR10bn in the quarter. The bank’s estimated adjusted CRD IV leverage ratio also remained unchanged at 3.1% (including legacy hybrid Tier 1 instruments), but Deutsche Bank announced that the recently announced changes to the calculation of the Basel III leverage ratio, if implemented into European regulation, would increase in the bank’s leverage exposure and reduce the leverage ratio. Deutsche Bank’s Viability Rating factors in our expectation that it will be able to maintain sound capitalisation on a look-through CET1 ratio and leverage ratio basis, and failure to maintain capitalisation in line with peers would put the rating under pressure. Deutsche Bank is subject to the asset quality review (AQR) being undertaken by the European Central Bank during 2014. Fitch believes that the bank's 14.6% phase-in Basel III (CRD IV) CET1 ratio gives it ample room to meet the 8% phase-in Tier 1 ratio required to pass the review. Deutsche Bank's asset quality remains sound with a gross impaired loans/total loans ratio of 2.5% at end-September 2013, but the bank disclosed that the end-June 2013 EUR19.7bn exposure defined as defaulted according to the European Banking Authority’s definition was substantially higher than the EUR9.3bn impaired gross loans according to the IFRS definition. However, Fitch does not expect this difference to result in any notable capital adjustment in the AQR because it mainly consists of loans not considered impaired under IFRS because of strong collateral coverage and of loans reported at fair value where IFRS impairment does not apply. Deutsche Bank’s CB&S business reported 4Q13 pre-tax profit of EUR354m adjusted for dva and cva (but not fva) down 24% qoq and 72% below 4Q12 pre-tax profit excluding impairment of goodwill and intangibles. Fixed income sales and trading revenue fell 24% qoq to EUR978m (31% yoy) as the rates business performed weakly and revenue in credit fell because of low client activity. The decline in fixed income trading at Deutsche Bank was more marked than at the bank’s US peers, partly reflecting the bank’s greater focus on European markets, which have performed worse than the US market. It will be important for the bank to demonstrate that it can further reduce its balance sheet without damaging its fixed income franchise, which would put earnings under pressure. Equity sales and trading generated EUR541m net revenue down 16% qoq (up 8% yoy), a trend more in line with US peers as market performance remained strong. Origination and advisory revenue held up well and reached EUR702m in 4Q13 as the equity origination performance more than balanced a slight drop in advisory businesses. Deutsche Bank’s private and business clients division’s (PBC) pre-tax profit fell by 23% yoy (37% qoq) largely as a result of higher costs relating to the integration of Postbank and the business refocusing programme, while revenue remained relatively stable. The bank’s retail businesses generated EUR1.6bn pre-tax profit in FY13, flat on FY12. Deutsche Bank’s strong franchise in the domestic retail segment should, in Fitch’s opinion, enable the bank to generate healthy profitability in this business. Deutsche Bank’s franchise in this more stable business underpins its Viability Rating and it will be important to demonstrate that it can improve its post-tax return on equity in the segment from its current modest level (FY13: 7% as calculated by the bank). The completion of the Postbank integration should help, and Fitch expects loan impairment charges in the domestic business to remain moderate in FY14 as the economic prospects remain healthy. However, revenue is likely to remain under pressure whilst interest rates remain low. Deutsche Asset and Wealth Management generated EUR781m pre-tax profit in FY13. Revenue increased slightly, but net new money outflows continued (EUR12bn in FY13), although this was mainly in low-margin and cash products. At end-2013, the bank had invested assets of EUR931bn, flat yoy. Global transaction banking reported EUR1.1bn pre-tax profit for FY13 as transaction volumes remained strong, but continued low interest rates meant that margins remained under pressure, and the business continues to incur costs to turn around its commercial business activities acquired in the Netherlands. Deutsche Bank’s non-core operations unit (NCOU), which comprises legacy assets and non-core operations, reported a EUR1.1bn pre-tax loss in the quarter and a EUR3.2bn pre-tax loss for FY13. The bank made significant progress in reducing assets in the unit during FY13, and despite the losses, the unit generated regulatory capital by reducing RWA. At end-December 2013, total assets in NCOU (adjusted for netting of derivatives and certain other components) amounted to EUR53bn, down from EUR95bn at end-2012. RWA in the unit (calculated under CRD IV) amounted to EUR60bn at year-end. Fitch expects further progress in gradual asset and risk reduction at the unit, but possible further litigation charges related to legacy, non-core activities and the potential for further impairments on assets as well as lower revenue on a reduced asset base mean that the unit could, in Fitch’s opinion, continue to be loss-making in FY14. Contact: Christian Scarafia Senior Director +39 02 87 90 87 202 Fitch Italia SpA V.lo S Maria alla Porta 1 20123 Milan Michael Dawson-Kropf Senior Director +49 69 76 80 76 113 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 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