Deutsche posts profit, but markets unimpressed

After reporting its first annual loss for more than 50 years in February, Deutsche Bank is back in the black, at least this quarter. Yesterday it reported a net income for the first quarter amounting to €1.2 billion ($1.5 billion), beating consensus analyst expectations of €742 million. In the same period last year, it took a net loss of €141 million.
 
Germany's largest bank posted net revenues of €7.2 billion for the first quarter of 2009, up 56% from €4.6 billion in the same quarter of last year. Earnings per share (EPS), on a diluted basis, were €1.92, compared to a loss of €0.27 per share for the same period last year. The bank also brought its leverage levels down to 25 times.
 
"In the first quarter of 2009, we saw some signs of stabilisation in the world's financial markets," said chief executive Josef Ackermann in a statement. "Compared with the extremely turbulent conditions of the final months of 2008, global markets were less volatile, and liquidity returned in some areas. Nevertheless, conditions in the wider economy remained very difficult."
 
Deutsche Bank's supervisory board met on Monday and unanimously decided to extend Ackermann's term as CEO for another three years. Reasons cited by the chairman of the supervisory board were Ackermann's steering of the bank through the financial crisis, the first-quarter results and leadership continuity. This means Ackermann will be at the helm of one of the world's largest financial institutions until 2013, bringing his total tenure to 13 years.

The main contributor to the return to profitability was investment banking. Corporate banking and securities recorded a pre-tax profit of €1.3 billion. Like at competitors J.P. Morgan and Goldman Sachs, the debt sales and trading businesses produced strong results with revenues up 185% from the first quarter of 2008 to €3.8 billion.

"The increase was driven by record revenues in interest rate and foreign exchange products and a strong performance in money market products, which all benefited from strong client flows and wider bid-offer spreads," the German bank says in a written statement announcing the results.
 
This raises the question of whether or not growth for Deutsche at this level is sustainable and what risks the firm is taking to yield such returns.

Ackermann attributes the increase in revenue to a focus on "flow" businesses -- such as foreign exchange, money markets and interest rate trading -- which, he says, have helped offset revenues drying up from structured products, which are suffering from liquidity issues.

In other business segments revenues failed to pick up. For the private clients and asset management division, net revenues were €1.9 billion compared to €2.5 billion in the first quarter of 2008.
 
And in asset and wealth management, net revenues at €515 million were half the €1 billion recorded in the same period last year. This was blamed on lower brokerage and fund management revenues due to a reduction in equity valuations.
 
Markdowns also remain an issue; it's just the configuration that's changed. In the first quarter, markdowns totalled €1 billion, of which €841 million was a provision against monoline insurers, €48 million was for commercial real estate, and €47 million to cover European residential mortgage backed securities. Compare this to the first quarter last year when there were €1.4 billion of markdowns, of which mortgage-backed securities accounted for €607 million and commercial real estate loans took up €441 million.

Provision for credit losses were up almost four-fold at €526 million, compared to €114 million in the first quarter of 2008. Of the €526 million, €357 million related to provisioning for the corporate and investment bank. The provision includes €218 million related to asset reclassification.

Compensation and benefits were up 1% to €3 billion over the same quarter last year, but the ratio of compensation to revenues for the quarter was 41%, down significantly from 64% in the first quarter of 2008.

Deutsche Bank's share price increased by 3.5% in Frankfurt trading on Monday, only to drop by 6.9%yesterday after the release of the results.