Deutsche Bank Profit Rises 30% on Securities Unit

May 8 (Bloomberg) -- Deutsche Bank AG, Germany's biggest bank, said first-quarter profit jumped 30 percent on record earnings from its securities unit.
Net income rose to 2.12 billion euros ($2.89 billion), or 4.28 euros per share, from 1.64 billion euros, or 3.11 euros, a year earlier, the Frankfurt-based bank said today. Profit topped the highest estimate of 16 analysts surveyed by Bloomberg.
Deutsche Bank, led by Chief Executive Officer Josef Ackermann, outpaced European rivals UBS AG and Credit Suisse Group as record revenue from sales and trading spurred investment banking earnings. Consumer banking and asset management profit fell and earnings growth trailed New York-based firms Morgan Stanley and JPMorgan Chase & Co.
``Conditions for investment banking are almost perfect,'' said Patrick Lemmens, who helps manage about $3.5 billion, including Deutsche Bank shares, at ABN Amro Asset Management in Amsterdam. ``The good conditions that we saw in the first quarter are continuing in the second.''
Deutsche Bank shares declined 93 cents, or 0.8 percent, to 115.37 euros at 1:02 p.m. in Frankfurt, valuing the company at about 60.6 billion euros. The stock gained 16 percent in the past year, compared with a 20 percent rise at Credit Suisse and a 1.7 percent increase at UBS.
Sales and Trading
Pretax profit at the investment bank, run by Anshu Jain and Michael Cohrs, rose 10 percent to 2.2 billion euros in the quarter, above the 2.07 billion euros estimated by analysts.
Revenue from sales and trading of stocks and bonds increased 16 percent to 5.1 billion euros, making Deutsche Bank the second biggest in trading on Wall Street after New York-based Goldman Sachs Group Inc. Revenue from underwriting and merger advice rose 17 percent to 797 million euros.
Consumer banking profit fell 3 percent to 293 million euros on costs to integrate Berliner Bank and Norisbank, purchased last year, while earnings from asset and wealth management dropped 19 percent to 188 million euros on lower performance fees in the real estate business.
``The lower-than-expected profits in the non-investment banking divisions may take some shine off the very strong investment banking results,'' Credit Suisse analyst Ivan Vatchkov said in a note to clients. ``This may revive investor concerns that Deutsche is overly dependent on investment banking.'' He has an ``outperform'' rating on the stock.
Revenue and Costs
Earnings were boosted by gains at the corporate investments division, where pretax profit more than doubled to 305 million euros on the sale of a 0.8 percent stake in Fiat SpA and a holding in Deutsche Interhotel Holding.
Total revenue rose 20 percent to 9.58 billion euros, exceeding analysts' estimates of 8.6 billion euros. Costs jumped 17 percent to 6.32 billion euros, boosted by higher performance- related compensation and acquisitions. That exceeded the 5.76 billion-euro estimate of analysts in the survey.
UBS's net income was hurt by losses tied to the U.S. subprime mortgage market at Dillon Read Capital Management, the hedge fund run by 50-year-old former investment-banking chief John Costas. UBS will pay $300 million to shut the fund. Credit Suisse, Switzerland's second-largest bank, generated record revenue from bonds and stock trading, making up for the sale of the Winterthur insurance division.
Deutsche Bank's profit growth lagged behind some of its largest U.S. competitors. Morgan Stanley, the second-biggest securities firm by market value, reported a 70 percent surge in profit. Earnings at JPMorgan, the No. 3 U.S. bank, jumped 55 percent in the quarter.
Lower Quality?
``The quality of earnings is lower than what we saw from Credit Suisse and UBS,'' because of greater dependence on trading, said Stefan Raetzer, who helps manage about $26.4 billion in equities at Allianz Global Investors. ``That is mirrored in the share valuation, as Deutsche Bank trades at a 10 to 20 percent discount to the other two banks.''
Deutsche Bank's shares trade at 8.2 times earnings per share, the lowest ratio among its nine biggest competitors, which include New York-based Goldman and UBS, the largest money manager. The average price to earnings ratio for Deutsche Bank's competitors is 11.5.
Takeover Battle
Deutsche Bank's securities unit, the biggest in Europe by revenue, could make it an attractive merger or acquisition target for a large European consumer bank, some analysts and investors said. Such a deal would boost the bank's ability to invest in its business and take more risk, Merrill Lynch & Co. analyst Stuart Graham wrote in an April 23 note to clients.
``If other European banks are pairing off, is Deutsche content with its broker dealer-centric model once and for all?'' Graham wrote. ``It may not be able to change its mind at a later date, since its few potential partners could have already done other deals.''
Ackermann, 59, said as recently as February that a ``transformational'' merger is not on the agenda. That was before the world's biggest banking takeover battle erupted over ABN Amro Holding NV, the largest Dutch bank. Barclays Plc, Britain's No. 3 lender, and a trio of banks led by Royal Bank of Scotland Group Plc are vying for control of Amsterdam-based ABN Amro.
``Consolidation of our industry, including cross-border mergers in Europe, may also create changes in the competitive landscape,'' Ackermann said in a letter to shareholders today. ``Deutsche Bank is well equipped to deal with these factors as our strategic position is strong,'' he said, reiterating that the bank will focus on internal growth and smaller acquisitions.
2008 Targets
Deutsche Bank aims to raise pretax profit, excluding one- time gains and costs, to 8.4 billion euros in 2008 by expanding consumer banking and asset management, Chief Financial Officer Anthony Di Iorio reiterated on a conference call with analysts today. That would mean an increase of about 5 percent from 2006 earnings.
``I wouldn't characterize it as aggressive or conservative, but rather as our stated target,'' Di Iorio said. He also repeated that the bank expects a pretax profit contribution of about 300 million euros in 2008 from acquisitions, including Berliner Bank and Norisbank, based in Nuremberg.