After staging a remarkable recovery in its stock price since last summer's record lows, nearly doubling from its September price, Deutsche Bank shares tumbled this morning after the bank reported a net loss of €1.89 billion for the fourth quarter, which while better than the €2.12 billion loss one year ago, was a big miss to the consensus expected shortfall of €1.32 billion.
For the full year, the bank reported a net loss of €1.4 billion, which while also better than last year, disappointed shareholders who sent the stock lower by more than 5% as of this moment, although as the FT chart below shows, shares are still up about 75% from a record low on Sept. 26, when news of the Justice Department’s initial request broke.
The miss also hit the top line with revenue from debt trading rising 11% from a year earlier to 1.38 billion euros but falling short of the 1.68 billion-euro average estimate. Equity trading revenue fell 23% to 428 million euros, Deutsche Bank said Thursday, while analysts had expected revenue to be flat.
Goldman was quick to slam the company's results, saying its Q4 operations were "very weak" even as there were "strong liquidity metrics," and there is evidence of franchise damage. It added that the 4Q loss of €1.9b is more than expected; underlying divisional pretax missed "across the board." Underlying divisional pretax came in at loss of €320m vs consensus for profit of €210m, while Goldman had expected a profit of €450MM. It also noted that IB revenue was weak, rose just 6% vs U.S. peers up 18%, and notes the bank's market share loss in FICC and Equities; FICC revenue increased 10% vs U.S. peers up 43%; Equities down 23% vs U.S. peers’ up 3%.
Embattled CEO John Cryan has been shrinking the bank's trading operations, built by his predecessor, and raising capital levels eroded by misconduct costs BBG added. While the bank has settled some of its biggest legal cases in the past two months, an initial request that it pay $14 billion to settle a U.S. Justice Department investigation of mortgage-backed bonds spooked some investors in the quarter.
Deutsche Bank took €1.59 billion of litigation charges in the fourth quarter, more than the €1.28 billion analysts surveyed by Bloomberg News had expected on average. While 2015 and 2016 were “peak years for litigation,” this year will continue to be “burdened by resolving legacy matters,” Deutsche Bank said in slides on its website.
The silver lining in the poor report is that Deutsche Bank’s common equity Tier 1 ratio rose modestly to 11.9% at the end of December from 11.1% three months earlier as it shrunk risk-weighted assets. That’s higher than the 11.3 percent analysts in the Bloomberg News survey had expected. Cryan has said he’s willing to sacrifice some revenue as he improves the firm’s internal controls and scales back debt-trading operations that require increasing amounts of capital.
The bank reiterated a plan to raise the ratio to at least 12.5 percent by the end of 2018. Assets weighted by risk will probably rise in the first quarter “to support business growth,” the bank said.
“We welcome the improvement in the capital position, but wonder if this has come at a cost to the profitability of the core franchise,” Citigroup Inc. analysts including Andrew Coombs said in a report. They have a sell recommendation on the stock.
Also, in a statement, Cryan said Deutsche Bank has experienced a “promising start to this year." Revenue will rise this year and the company had a “strong” January across almost all its businesses, according to a presentation the bank published on its website.
“There was a clear impact from the negative news flow around Deutsche Bank in the fall, especially on the global markets unit,” said Daniel Regli, an analyst with MainFirst whose recommendation on the stock is under review. “It remains to be seen whether this effect will be reversed in 2017.”
A criminal investigation of the trades by the Justice Department is ongoing, Bloomberg notes. The bank also hasn’t resolved investigations into whether it manipulated foreign-currency rates and precious metals prices. To help shoulder those costs, the company said last month that it will scrap the bonuses of its top executives for a second straight year and slashed variable compensation for other senior employees to shore up capital. Deutsche Bank is also considering raising capital through the sale of a stake in its asset management unit in an initial public offering, according to people familiar with the matter. That division generated a 753-million pretax loss after writing down the value of the Abbey Life unit it agreed to sell to Phoenix Group Holdings in September. Asset management generated a 173 million-euro pretax profit in the year earlier quarter. The business saw 13 billion euros of net outflows in the quarter, the highest since redemptions started in the third quarter of 2015.
Cryan said in a speech in Berlin that he’s seeing signs of better times ahead and will continue to focus on resolving the bank’s “legacy issues.” Shareholders have yet to be convinced.