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Deutsche profit surprises

October 26, 2017

The German lender has beaten analysts' expectations for third-quarter profit and has settled another case of its financial crisis wrongdoings. But meagre revenues show the bank is far from being out of the woods.

Deutsche Bank Zentrale in Frankfurt am Main
Image: Reuters

Deutsche Bank reported Thursday that its third-quarter net profit more than doubled compared with the same period in 2016, reaching 647 million euros ($761 million) and beating the expectations of analysts who had forecast net profit to come in at 586 million in a poll by FactSheet. Operating profit increased 51 percent, to 933 million euros.

Overall revenue, however, fell 7.0 percent to 6.8 billion euros amid a sharp slump in the bank's corporate and investment banking business, which was down 23 percent in the quarter on "muted client activity and low [financial market] volatility." The private and commercial bank reported revenues up by 3.0 percent, while the asset management unit's results were stable.

"The revenue environment remains challenging," chief executive (CEO) John Cryan said, while adding that "we have made significant progress" on restructuring plans aimed at streamlining the bank.

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A year ago, Deutsche Bank appeared to teeter on the brink of a crisis as its shares plunged, and clients fled when it emerged that the US Department of Justice was pursuing a vast $14 billion penalty over mis-sold mortgage securities in the United States. In addition to being affected by thousands of high-profile legal cases resulting from its financial wrongdoings, Deutsche Bank has been suffering from years of economic crisis and low interest rates in its European home region.

Progress on settlements

While most of the biggest cases have been cleared aside, a reminder of the remaining burden came late Wednesday as the bank agreed with 44 US states and the District of Columbia to pay $220 million over an interest rate fixing scandal.

The sum will settle charges including collusion with competitors to manipulate the US dollar Libor and other benchmark interest rates. Those are important for bank customers as they stipulate interest rates from mortgages to student loans.

"We will not tolerate fraudulent, manipulative or collusive conduct that interferes with or undermines confidence in our financial markets," said New York Attorney General Eric Schneiderman in a statement.

The misconduct of Deutsche Bank and others had defrauded governments, nonprofit organizations and bank customers of funds that otherwise could have been used to benefit them, he added.

Cryan clings on

As Deutsche's shares are worth barely half of what they were when John Cryan took the helm at the bank in the summer of 2015, some shareholders are losing faith that he can reverse that trend.

None of Deutsche's biggest investors has gone public with their criticism yet, although Union Investment — which owns less than 0.5 percent of the bank — said this month that "pressure will mount" on management unless the underlying business improves.

According to information by the Financial Times (FT), a major Deutsche Bank investor may be planning to call for a vote of no confidence at an annual shareholder meeting scheduled for next May. Under Cryan's leadership, revenues have fallen by about 25 percent and profits are anemic.

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Speaking to Cryan, the British business daily quoted him as saying that he intended to "carry on at least until my contract ends [in 2020]."

"At the moment the job is getting more fun every day. The heavy lifting is almost over," he told the FT.

The FT wrote that Cryan's supporters had pointed out that he had resolved two of the bank's biggest problems: first settling that legacy legal claim for $7.2 billion and plugging a shortfall of capital with an 8-billion euro equity increase.

HNA, the Chinese conglomerate that is the bank's biggest investor, was also understood to be supportive of the CEO, the FT said, quoting an HNA insider as saying: "He’s doing a good job. It wouldn’t be the right time to change the chief executive."

Aside from HNA, the bank's other top shareholders comprise the Qatari royal family, with approximately 9 percent of the shares, followed by US fund groups BlackRock and Vanguard.

uhe/nz (Reuters, AFP, dpa)