Weak quarter mars Deutsche Bank's return to the black

FRANKFURT (Reuters) - A bigger than expected loss in the fourth quarter and weakness at its investment bank overshadowed the first annual profit in four years for Deutsche Bank.

Germany’s largest lender has been trying to turn itself around under a new leadership, but has faced a series of hurdles, including allegations of money laundering, ratings downgrades and failed stress tests.

Deutsche has also become the subject of rampant merger speculation, and Friday’s earnings figures underscore that the company still has a long way ahead to post a sustainable profit.

Time is running out for the bank to turn around on its own, making a merger with rival Commerzbank more likely, two people with knowledge of the matter said on Thursday.

Results were a mixed bag, with Deutsche posting a full-year profit of 341 million euros ($390 million), compared with a net loss of 735 million euros in 2017.

“Our return to profitability shows that Deutsche Bank is on the right track,” said Chief Executive Christian Sewing, who took over last April and has embarked on plans to cut more than 7,000 jobs in an overhaul of the bank.

“In 2019, we aim not only to save costs but also to make focused investments in growth,” he said.

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Sewing, in an interview with Reuters TV, said he was optimistic that profit would grow in 2019.

But it was not all good news.

On the downside, the fourth-quarter net loss of 409 million euros was greater than the 268 million euros expected on average by analysts, according to a consensus report on the bank’s website.

The quarter was marked by continued weakness in its key trading business. Revenue at its cash-cow bond-trading division plunged 23 percent.

For the investment bank as a whole, revenue dropped 5 percent in the fourth quarter. Executives said that negative headlines about police raids on the bank in November dented business.

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“The weakness in investment banking is striking,” said Alexandra Annecke, fund manager with Union Investment, which holds the bank’s stock.

“It needs to finally be possible to stop the loss of market share,” she said.

Analysts at Citigroup said they feared that Deutsche’s investment bank would continue to lose ground to competitors. A downgrade in market expectations for future earnings is possible, they added.

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The bank’s shares lost more than half their value in 2018, though they have recovered slightly over the past month. They opened slightly higher early in Frankfurt but were down 3.1 percent by 1200 GMT.

Sewing, in a call with analysts when asked about merger speculation, said that the bank was focused on executing its plan and that he had a “lot of confidence”. He later told journalists the bank was fully focused on its “homework” of turning around the bank.

Sewing also denied there was any pressure from the German government to merge.

“I do not feel that. And there is no intervention either,” he was quoted as saying by German broadcaster n-tv.

Speculation of a merger between the two has heightened under the tenure of Finance Minister Olaf Scholz, who has spoken in favor of strong banks. His team has met frequently with executives of Deutsche, Commerzbank and major shareholders.

Deutsche is considered one of the most important banks for the global financial system, along with JPMorgan Chase, Bank of America and Citigroup.

But the German lender has been plagued by losses and a scandal. A $7.2 billion U.S. fine in 2017 for its role in the mortgage market crisis was a major blow that spooked clients and concerned regulators.

The European Central Bank has set conditions for a possible merger between Deutsche and Commerzbank, Sueddeutsche Zeitung reported on Friday, citing banking supervision sources.

Both banks would need achieve sustainable profitability to be allowed to merge, according to sources cited in the report. Shareholders may need to inject further capital, it said.

($1 = 0.8744 euros)

Reporting by Tom Sims, Patricia Uhlig, Andreas Framke, Hans Seidenstuecker, Arno Schuetze and Tilman Blasshofer; Editing by Thomas Seythal and Sherry Jacob-Phillips