Deutsche Bank Profits Hit by European Debt Crisis as Investment Earnings Plunge

Deutsche Bank, Germany's largest bank, said earnings at its investment banking arm fell by 63 percent as the on-going sovereign debt crisis hit client trading activity and investor confidence.

Pretax profit from investment banking, the largest unit in the group, dropped to €357m in the second quarter this year, from €969m in the year-earlier period the bank said in a statement Tuesday. The slump helped cut overall profit at the Frankfurt based lender by nearly 45 percent as net income for the quarter fell to €661m, compared to €1.2bn in the second quarter 2011.

"In the second quarter, the Bank's performance was impacted by a volatile environment," said co-CEOs Jürgen Fitschen and Anshu Jain. "The European sovereign debt crisis continues to weigh on investor confidence and client activity across the bank. Our core tier 1 ratio was 10.2 percent at the end of the second quarter, well in excess of the 9% threshold set by the European Banking Authority for June 2012." 

Group revenues fell to around €8bn from €8.5bn during the same three-month period last year while sales at the investment banking unit fell 11 percent to €3.5bn.

Global Transaction Banking (GTB), figures, however, surprised with net revenues rising by 10 percent to €972m, compared to the second quarter last year, following strong fee and interest income reflecting growing client volumes and balances in a continuously low interest rate environment.

However, the growth in business activity in this area resulted in insurance related costs, as well as performance-related compensation and integration costs which meant non-interest expenses rose 12 percent compared with the same period last year to €616m in the second quarter 2012.

Deutsche Bank were little changed at €24.6 following the results after falling as much as 2 percent in the opening minutes of trading in Frankfurt. The bank last week told investors in a preliminary statement that it expected a steep decline in quarterly pre-tax profit.

Deutsche Bank at the Crossroads

Last week, Deutsche Bank unveiled major cost cutting, risk reducing and capital boosting plans in the face of regulatory requirements and analysts weighed the cost of any involvement in the global libor-rigging scandal as it pre-reported earnings that missed expectations.

Deutsche Bank said in a preliminary results statement that net income fell to around €700m from €1.2bn a year earlier, a figure that missed analysts' estimates by 30 percent.

As part of 2013 Basel III regulatory capital requirements, Deutsche Bank emphasised that it will reduce the number of risk-weighted-assets and in tandem will reduce costs through job cuts.

In tandem with Deutsche Bank's results statements, a report by Reuters revealed that "an internal probe at Deutsche Bank has found that two former traders may have been involved in colluding to manipulate global benchmark interest rates but there was no indication of failure at the top of the bank. The internal probe has not yet been concluded and only preliminary findings have emerged so far, three people close to the investigation said."

In Europe, central banks and regulators will be ramping up efforts to address the way Libor is currently calculated and investigate most banks, not just Barclays, when it comes to rate manipulation, after the UK group settled for a record £290m fine for its involvement.

According to numerous media reports, traders at Deutsche Bank, HSBC, Societe Generale and Credit Agricole are currently under investigation for interest-rate manipulation as part of a global probe.

Citing unnamed sources and with no confirmation or comment from the people or the banks themselves, Reuters and the FT said that regulators are investigating the possible roles of Michael Zrihen at Credit Agricole, Didier Sander at HSBC and Christian Bittar at Deutsche Bank.

Deutsche Bank has still yet to return a response to these reports over the last week, after IBTimes UK sought comment.