Deutsche Bank forecasts a loss of nearly $7 billion, taking an array of charges
Deutsche Bank, the German bank that has a big presence on Wall Street and is facing much regulatory scrutiny in the United States, has warned that it expects to post a hefty loss in the third quarter.
The bank, Germany’s largest, forecast a net loss of 6.2 billion euros, or nearly $7 billion, for the quarter. It comes just months into the tenure of Deutsche Bank’s new co-chief executive, John Cryan, who is trying to overhaul the institution. Along with the scandal and upheaval at Volkswagen, Deutsche’s struggles point to some of the weaknesses of Germany’s corporate culture.
“The news is not good, and I expect a number of you will be very disappointed by it,” Cryan said in a memo to employees on Wednesday. “We expect to report a sizable loss for the third quarter.”
Deutsche also said that it would recommend reducing or eliminating its dividend for the rest of 2015. A dividend cut is a jarring move for any bank. It often suggests that a bank is trying to conserve its capital, the financial foundation of a bank that can protect it from shocks and losses. On some measures, Deutsche has less capital than some of its better-performing peers.
The net loss is driven by a combined $8.5 billion in financial hits. New chief executives often take “kitchen sink” financial charges to clean up problems or complete unfinished tasks left
JOHN CRYAN Co-chief executive, Deutsche Bank by the former leaders — and this may be what’s happening at Deutsche. But at troubled companies, the first set of charges is often not the last.
Still, shareholders of Deutsche might take heart from the fact that the third-quarter loss stemmed mostly from a $6.5 billion write down of so-called intangible assets. These can be assets that reflect past paper gains, so reducing their value is not thought to be as serious as slashing the value of, say, financial assets like bonds or loans. Still, the write-downs of intangible assets appeared to be prompted by higher capital requirements by regulators. Since many regulatory capital changes have been known for a while, it is not clear why Deutsche would be taking the charge now.
Cutting the value of intangible assets may not have much of an impact on an important regulatory capital measurement, something that Deutsche noted in its news release.
In addition, Deutsche said that it would write down its stake in a Chinese bank, Hua Xia Bank, by nearly $700 million. “This reflects an updated valuation triggered by a change of the intent of the holding as Deutsche Bank no longer considers this stake to be strategic,” the bank’s statement said.
Deutsche also said it expected to set aside $1.3 billion to cover future legal penalties. In the United States, government agencies are, for instance, trying to determine whether Deutsche broke sanctions laws when handling payments to Iran and whether it manipulated foreign exchange rates.
In his memo, Mr. Cryan hinted at a move that might lessen some of the anger among shareholders. He said that the write downs and any dividend cut would have to be factored into employees’ compensation for 2015. Even so, such pay cuts may not be particularly deep, given that he added in his memo, “You have my personal commitment to try to achieve a fair balance between staff and shareholder interests.”
Mr. Cryan, who helped lead the recent overhaul of UBS, a Swiss investment bank, also reminded employees that he had previously told them, “I was not expecting all would be sweetness and light in the coming months.”