Deutsche Bank posts loss

Deutsche Bank shocked the market with its surprise week-early earnings announcement, which was more than a $1 billion loss.

The Wall Street Journal had this story by Ulrike Dauer, David Enrich and Eyk Henning:

Deutsche Bank AG’s surprise €1 billion ($1.35 billion) fourth-quarter loss suggests that a new phase of banking cleanups is getting under way in Europe, a likely precursor to other European lenders absorbing financial hits.

European regulators, trying to douse the Continent’s banking crisis, are working on a round of examinations of banks’ books, scheduled for completion later this year. The goal is to identify lurking losses and force banks to set aside more money to cover future bad loans and, where necessary, to raise more capital.

Deutsche Bank’s loss appeared to partly reflect the bank acting in anticipation of the greater regulatory scrutiny, analysts said. The bank announced its quarterly results late Sunday, more than a week earlier than planned. On Friday, The Wall Street Journal had reported about the bank’s lackluster financial performance. In Frankfurt, Deutsche Bank’s shares fell 5.4% on Monday.

The loss, compared with analysts’ expectations of a nearly €700 million profit, is the latest blow to Deutsche Bank’s management, led by co-CEOs Anshu Jain and Jürgen Fitschen.

It marks the third time in the past five quarters that Deutsche Bank’s results have missed market expectations. And the bank, one of Europe’s largest by any measures, is facing an array of government investigations into the conduct of the bank and its employees.

Jack Ewing wrote for the New York Times that an economic turnaround in Europe isn’t likely to help the bank anytime soon:

Anshu Jain, the co-chief executive of Deutsche Bank, argued during a conference call on Monday that, despite the loss, “2014 will represent the turning point” in dealing with lingering problems of the financial crisis, which include a long list of legal woes and pressure from regulators to reduce risk.

If so, and if Deutsche Bank were part of a turnaround among European banks, it would be good news for the euro zone economy, which is barely growing, in part because credit is scarce.

But it may be more likely that any revival of Deutsche Bank and its big competitors, like Barclays and HSBC, will be based on growth in Asia or the United States and pass Europe by, said Kern Alexander, a professor of law and finance at the University of Zurich. The midsize banks that do much of the business and consumer lending in Europe will continue to struggle, Mr. Alexander said.

“The big global banks that are more multinational and more diverse are able to weather the storm,” he said. “The big question is, Will the banks be able to make loans and help the economy turn the corner?”

The Reuters story by Thomas Atkins emphasized the legal troubles the bank is having, something that is plaguing the entire industry as it works to recover from the financial crisis:

The unexpected loss is likely to compound the problems that have dogged the bank over the past year, especially a lengthening list of lawsuits and regulatory matters, and to redouble pressure on co-chief executives Anshu Jain and Juergen Fitschen to prove their turnaround plan is on track.

In a statement, the German bank said it would meet its 2015 targets but warned that 2014 would again be tough: “We expect 2014 to be a year of further challenges and disciplined implementation.”

The bank said that litigation cost it 528 million euros in the quarter, bringing the year’s bill for fines and settlements to 2.5 billion euros and lowering its litigation reserves to 2.3 billion euros at year-end.

Deutsche Bank was fined $1.9 billion in December by the U.S. Federal Housing Finance Agency to settle claims that it defrauded two U.S. government-controlled companies in the sale of mortgage-backed securities before the 2008 financial crisis.

It was also fined 725 million euros by EU antitrust regulators for rigging interest rates.

The lender has suffered a hailstorm of criticism in recent weeks, fanning a sense of crisis at Germany’s flagship lender as the list of scandals, investigations and negative headlines lengthens, while costly settlements and a downturn in trading revenue weigh on profit.

Bloomberg had this story by Nicholas Comfort, which had some analysts praise for investors:

The bank agreed to pay U.S. financing companies Fannie Mae (FNMA) and Freddie Mac 1.4 billion euros to settle claims that it didn’t provide adequate disclosure about mortgage-backed securities. The European Commission fined Deutsche Bank 725 million euros on Dec. 4 for its part in rigging interest rates linked to the London interbank offered rate. The company said Dec. 19 that it reached a settlement to forfeit 221 million euros to end a derivatives contract with Italian bank Banca Monte dei Paschi di Siena SpA.

“Deutsche Bank management deserves credit,” Kian Abouhossein, an analyst with JPMorgan Chase & Co. (JPM) in London who has an overweight recommendation on the stock, wrote in an e-mailed report today. The firm “is still in restructuring mode but management has delivered on our wish-list of aggressive exposure reduction, bringing forward of cost savings and settlement of some litigations.”

It looks like management still has a lot of work to do. Deutsche Bank’s exposure to bond markets and the European economy were big drags for the quarter. The New York Times story pointed out that the European economy is more credit dependent than the U.S. and that financial firms are caught in a tough spot of needing to make more loans in a down market. It’s a hard cycle to break.