Deutsche Bank surprises with profit as legal costs deferred

By Thomas Atkins and Jonathan Gould

FRANKFURT (Reuters) – Deutsche Bank (DBKGn.DE) has posted a surprise pretax profit of 253 million euros (188 million pounds) in the last quarter of 2014, helped by an unexpected drop in litigation costs and an upswing in trading revenue at its investment bank.

Germany’s largest lender was able to postpone major legal expenses in the quarter because a number of major cases have yet to be settled, but the threat of future fines still hangs over the lender, frustrating management’s efforts to improve shareholder returns.

Deutsche Bank’s co-chief executives Anshu Jain and Juergen Fitschen will update investors by the end of June on a strategic review of its universal banking model, but in the meantime a surprise jump in debt trading is a boost for their commitment to be Europe’s “last man standing” in investment banking.

Deutsche Bank reported a 20 percent increase in trading revenue in its investment bank, including a 13 percent rise in debt trading, the group’s single-biggest profit motor. The jump bucked the declines seen by U.S. rivals such as Goldman Sachs (GS.N) and Morgan Stanley (MS.N).

Deutsche Bank shares were up 2.1 percent in early trade, while the DAX index (.GDAXI) of German blue chips was down 0.3 percent.

Overall, analysts had expected the bank to post a pretax loss of 83 million euros for the quarter, according to the median result of a Reuters poll. Analysts expected the bank to post 1 billion euros in litigation costs in the quarter compared to the actual 207 million that was booked.

Deutsche warned in a presentation for investors, however, there was still significant uncertainty as to the timing and size of potential legal costs.

CLEARING THE DECKS

Deutsche had originally hoped to clear the decks of legal issues in 2014, but has indicated 2015 will likely be the year instead when the majority of investigations are concluded.

It is being probed across a range of divisions, over issues including possible attempts at interest-rate and forex benchmark manipulation and possible violations of U.S. sanctions on Iran.

Pretax profit for the full year more than doubled to 3.1 billion euros but the group remains far from its own profitability goals, reporting a return on equity of only 2.6 percent for the fourth quarter compared with its own target of around 12 percent by 2016.

Pay costs rose 12 percent in the last quarter from a year before due to new hires, including in its wealth management division. Its cost-to-income ratio fell to 77 percent in the quarter from 85 percent a year ago, but still way above the European average of around 63 percent.

The lag in profitability and stubbornly high costs have prompted Jain and Fitschen to considering selling half of Deutsche’s Postbank-branded (DPBGn.DE) retail unit, which it bought from 2008 to 2012 for over 6 billion euros.

By splitting off its retail operations, Deutsche would simplify its model, raise capital and retreat from the low-profit battlefield that is German retail banking.

(Writing by Carmel Crimmins; Editing by David Holmes)