FITCH: DEUTSCHE BANK'S 4Q15 RESULTS
HIGHLIGHT WIDE-RANGING CHALLENGES
Fitch Ratings-Frankfurt/London-28 January 2016: Fitch Ratings says Deutsche Bank AG's
(Deutsche Bank; A-/Stable/a-) 4Q loss underlined the wide range of challenges it faces in
becoming a more profitable, better-capitalised and more efficient bank.
A sharp decline in debt sales and trading revenue in 4Q15 (down 16% yoy; 45% qoq) added to
the list of challenges comprising continued high litigation charges and higher operating expenses.
Higher-than-expected revenue attrition as a result of market share losses, business closures or exit
of key personnel is a rating sensitivity (see 'Fitch Downgrades Deutsche Bank to 'A-'; Outlook
Stable', dated 8 December 2015 on www.fitchratings.com). We expect the bank to face further
pressure on its revenues and earnings in 2016.
Nevertheless, Deutsche Bank still reported an 8% yoy increase in sales and trading revenues for the
full year, despite a very strong 4Q14, compared with most of its global trading and universal bank
(GTUB) peers. Full year revenues were helped by favourable foreign exchange movements.
Deutsche Bank's EUR2.7bn pre-tax loss for 4Q15, down from the pre-tax EUR253m profit
in 4Q14, was partly driven by EUR1.2bn litigation expenses, a similar amount to 3Q15, and
EUR0.8bn restructuring charges. For the full year the bank reported a pre-tax loss of EUR6.1bn
and an after tax loss of EUR6.8bn, including EUR1bn restructuring charges, EUR5.2bn litigation
charges and EUR6.5bn of impairments of goodwill, intangibles and Deutsche Bank's share in
China's Hua Xia Bank.
Revenue in the bank's core activities in 4Q15 was down 9.5% yoy and operating expenses adjusted
for restructuring and severance, litigation, benefits and claims, impairment of goodwill and other
items increased 6.8% yoy. In addition, Non-Core Operations Unit (NCOU) reported net revenues
of minus EUR304m in 4Q15, mainly driven by mark-to-market losses, compared with revenues of
EUR152m in 4Q14. The bank's planned accelerated wind-down of the NCOU to below EUR10bn
in risk-weighted assets (RWAs) by end-2016 will likely have a significant negative impact on pretax profit in 2016, but Deutsche Bank expects the deleveraging process to be accretive to its CET1
ratio.
Deutsche Bank's CB&S businesses reported a EUR1.2bn pre-tax loss compared with a EUR323m
pre-tax profit in 4Q14, but an improvement on its EUR2.7bn pre-tax loss in 3Q15. The segment's
poor performance was mainly driven by the above-mentioned drop in revenues but also higher
valuation adjustments (CVA, DVA, FVA), restructuring charges and litigation expenses, totalling
EUR590m, compared with EUR117m in 4Q14.
Difficult trading conditions in residential mortgage-backed securities, credit solutions, cash
equities and equity derivatives could not be offset by stronger credit and rates revenues,
contributing to a 21% yoy revenue decline in 4Q15 debt and equity sales and trading. Cash equities
revenues were lower yoy in 4Q15, partly as a result of market share losses. Advisory revenue
dropped 38% yoy, compounded by a 44% decline in origination revenue. Deutsche Bank claims
that the latter was partly affected by a voluntary reduction in risk appetite for certain leveraged
finance transactions.
Deutsche Bank's private and business clients businesses reported a EUR675m pre-tax loss in
4Q15, compared with a EUR8m pre-tax profit in 4Q14, largely reflecting a total of EUR721m of
restructuring expenses, litigation charges and impairments.
Pre-tax profit from Deutsche Bank's asset and wealth management businesses fell 23% to
EUR274m in 4Q15 compared with EUR358m in 4Q14, driven by a jump in compensation
expenses. Despite a challenging low-interest rate environment global transaction banking's
performance improved in 4Q15, posting a 40% yoy rise in pre-tax profits to EUR347m, helped by
FX developments.
Deutsche Bank's fully applied Common Equity Tier 1 (CET1) decreased 40bps during the quarter,
to 11.1% as capital declined to EUR44.1bn from EUR46.9bn, driven primarily by the bank's
earnings loss in the quarter. We understand from the bank that the sale of 19.99% stake in Hua Xia
Bank on 28 December 2015 will bring capitalisation up to a pro-forma end-2015 CET 1 ratio of
11.7%, subject to regulatory capital and capital composition at time of closing. The sale of Hua Xia
Bank should also have a positive impact on the fully-loaded leverage ratio, which dropped to 3.5%
in 4Q15 from 3.6% at end-3Q15. Maintaining sound capitalisation is an important rating driver.
Deutsche Bank disclosed that the ECB requires it to maintain a minimum 10.25% CET1 ratio
in 2016 as part of the Supervisory Review and Evaluation Process (SREP). Additionally, the
bank's G-SIB buffer is being phased-in to 2% by 2019 from 0.5% in 2016, bringing total CET1
requirements to 10.75% in 2016. As at 1 January 2016, the bank had a EUR7bn buffer above these
requirements. Although management commented that available distributable items under German
GAAP at the parent bank should be sufficient to cover distributions on AT1 instruments, a breach
of the SREP requirement would in our view likely result in non-payment of AT1 coupons. In our
view, the bank's 12.5% fully-loaded CET1 ratio target by 2018 represents only a limited 25bps
buffer over 2019 requirements.
Fitch downgraded Deutsche Bank's Long-term IDR and debt ratings in December 2015 because
the ongoing and necessary restructuring of the bank will, in our view, have a greater-than-expected
negative impact on its earnings and capital, so that its financial metrics will likely be weaker than
those of its peers at least until end-2016. In addition, improvements in the bank's metrics rely, to
a large degree, on current revenues being maintained or improved, hence increasing the bank's
vulnerability to adverse business conditions.
Contact:
Michael Dawson-Kropf
Senior Director
+49 69 76 80 76 113
Fitch Deutschland GmbH
Neue Mainzer Strasse 46-50
60311 Frankfurt am Main
Claudia Nelson
Senior Director
+44 20 3530 1191
Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:
elaine.bailey@fitchratings.com.
Additional information is available on www.fitchratings.com
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