FRANKFURT : Deutsche Bank, the biggest bank in Germany, put in a better-than-expected performance in the third quarter, signalling the worst is probably over for the German financial sector, even if major challenges still remain.
In a generally positive interim report published Thursday, Deutsche Bank said it expected to achieve "very satisfactory" full-year earnings after cost-cutting and a substantial reduction in risk provisions enabled it to swing back into the black in the third quarter.
Only a day earlier, Deutsche Bank's closest rival, Munich-based HypoVereinsbank, had said it also returned to profit in the third quarter after four consecutive quarterly losses, not only thanks to windfall gains from divestments, but to an improved operating performance as well.
German banks described 2002 as their worst year since World War II.
But drastic restructuring, including massive job cuts, and strategic overhauls have helped banks get back on their feet.
Deutsche Bank chairman Josef Ackermann boasted that his group had made "good progress in strengthening its businesses and increasing its operational capacity. This progress was reflected in third-quarter results."
The bank's net profit outpaced analysts's expectations, rising to 576 million (674 million dollars) in the period from July to September from a net loss of 299 million euros in the corresponding period a year earlier.
Before taxes, too, the bank was back in the black with a pre-tax profit of 755 million euros in the third quarter, compared with a year-earlier loss of 181 million euros.
These were "solid numbers," said Sal. Oppenheim analyst Metehan San.
"The solid and sustained year-to-date performance, together with a better global economic environment, gives me and my colleagues great confidence that we can look forward to a full-year 2003 performance which will be very satisfying for our shareholders," Ackermann said.
Behind the improvement were the greatly reduced risk provisions, still much the bane of German banks as the long economic downturn led to a record number of corporate failures last year and probably this year as well.
Deutsche Bank succeeded in slashing its risk provisions to 174 million euros in the July-September period from 753 million euros a year earlier.
"We saw a further improvement in the quality of our loan book, giving rise to lower provisions for credit losses and a further reduction in problem loans," Ackermannn said.
Costs were also under control, with admiministrative costs falling by 13.5 percent to 4.232 billion euros.
But challenges remain and on the earnings side, things were not quite so rosy, with overall income falling by 5.5 percent to 5.161 billion euros and the bank's return on capital still far behind those of its interational rivals.
Among the different earnings components, net interest income before risk provisions fell by 5.8 percent to 1.612 billion euros in the third quarter and net commission income was down by five percent at 2.379 billion euros. And even though trading income rose by four percent to 940 million euros, it was down compared with the second quarter, a fact which disappointed analysts and investors.
"Trading income decreased significantly (on a quarterly basis). This is a major worry," cautioned Merck Finck analyst Konrad Becker.
Investors thought so, too, sending Deutsche Bank shares down to an intraday low of 55.96 euros on the Frankfurt stock exchange, a drop of 1.79 euros or three percent on the day, in a generally weaker market.
Deutsche Bank explained that trading volumes were traditionally low in July and August, while in the second quarter trading income was usually boosted by dividend payments.
Furthermore, the strong euro and the divestment of a number of businesses during the past 12 months have also had a negative on the revenue base.
There were also clouds on the horizon for Deutsche Bank, with the upcoming trial of chairman Josef Ackermann on charges of breach of trust in the so-called Mannesmann affair.
The trial is set to begin in January and could become one of the most spectacular corporate trials in Germany.