When it comes to picking a poster child for everything that’s wrong with Wall Street and the financial industry in general, it’s sometimes difficult to decide just who gets the blue ribbon for “most nefarious.”
Indeed, since 2008 we’ve learned that virtually every systemically important financial institution on the face of the planet has at one time or another engaged in some manner of chicanery be it the manipulation of the world’s most important benchmark rates, the peddling of worthless mortgage bonds, or the rigging of FX markets.
Having said all of that, Deutsche Bank may well qualify as the institution that “best” exemplifies the banking industry’s penchant for greed, corruption, and general malfeasance.
From rate rigging to book cooking to deplorable HR procedures, the German lender has it all and last summer, the bank showed co-CEOs Anshu Jain and Jürgen Fitschen the door amid shareholder pressure to reform the corporate culture and improve performance.
To be sure, new CEO John Cryan has his hands full.
The bank is saddled with mountainous legacy litigation and faces an uphill battle to streamline operations. Back in October, Cryan announced that Deutsche would cut 35,000 positions and exit 10 countries as part of a sweeping overhaul.
Oh, and Cryan also preannounced a massive loss and subsequently scrapped the dividend.
On Thursday, we got the latest bad news out of Deutsche as Cryan reported what he called “sobering” results for 2015. In short, the bank is staring down a net loss of €6.7 billion for the year, the first annual loss since 2008. The shares plunged.
Some €1.2 billion in litigation fees contributed to €2.1 billion in charges incurred during Q4, a quarter in which the securities trading unit underperformed.
“These are extremely poor results,” Citi’s Andrew Coombs said in a note, referencing the underlying (i.e. ex-litigation and restructuring) results which showed a pre-tax loss of €600 million for Q4.
“The miss is partly due to revenues of €6.6bn, which are 11% (€0.8bn) below consensus and down -16% yoy,” Coombs writes. “[But] this alone still fails to explain €0.7bn of the underlying miss,” he continues, adding that “it would appear that either investment spend has been front-loaded or alternatively (and far more likely in our view) that the bank has also been forced to book elevated credit losses during the quarter.”
Yes, “elevated credit losses.” Imagine that.
If we had to venture a guess, we'd say those losses are likely to mount going forward given the increasingly precarious environment for credit.
And don't expect the bank's legal woes to go away any time soon either. "We see further downside risk on litigation – we model another €3.6bn in 2016 - which is likely to necessitate a capital raise," Citi goes on to warn.
"Overall, this development confirms our view that the task facing new management is very demanding. Litigation issues do not end with this mark down – we expect them to persist for a multi-year period," Goldman adds.
Right, so what Citi and Goldman are trying to tell you is that this is an umitigated disaster and a dilutive capital raise is probably just around the corner because the bank apparently did so many things wrong that the litigation is likely to last forever - literally.
Citi cut its price target on Deutsche by a whopping €7 and cut 2015 EPS estimates by 17%.
We wonder if John Cryan is regretting the decision to try and clean up this truly epic mess.
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Full PR from Deutsche Bank
Deutsche Bank (XETRA: DBKGn.DE/NYSE: DB) today announced that it expects to incur a number of charges that will contribute to an overall loss for the fourth quarter 2015:
- Expected litigation charges of approximately EUR 1.2 billion, the majority of which are not anticipated to be tax deductible. These provisions are preliminary and may be further changed by events before publication of the bank’s annual financial statements on March 11, 2016 - Restructuring and severance charges of EUR 0.8 billion. These charges are largely related to the Private & Business Clients (PBC) segment. PBC will also take a EUR 0.1 billion charge for the impairment of software
The bank expects to report full year 2015 revenues of EUR 33.5 billion. As a result of the above charges, the bank expects to report a full year 2015 loss before income taxes of approximately EUR 6.1 billion and a net loss of approximately EUR 6.7 billion. The full year results include previously disclosed impairments taken in the third quarter of EUR 5.8 billion of goodwill and intangibles, full year litigation provisions of approximately EUR 5.2 billion and restructuring and severance charges of approximately EUR 1.0 billion.
Challenging market conditions in the quarter contributed to a year-over-year decline in fourth quarter revenues, principally in Corporate Banking & Securities (CB&S). As a result of these revenue developments and the specific charges for the fourth quarter mentioned above, the bank expects to report revenues of EUR 6.6 billion, a loss before income taxes of approximately EUR 2.7 billion and a net loss of approximately EUR 2.1 billion for the fourth quarter.
Deutsche Bank currently expects to report a fully-loaded CRR/CRD4 Common Equity Tier 1 (CET1) ratio at the end of the fourth quarter of approximately 11%. The regulatory capital treatment of the bank’s Abbey Life business has changed in the fourth quarter, resulting in an approximate 10 basis point reduction in the CET 1 ratio. Additionally, the previously announced agreement to sell the bank’s 19.99% stake in Hua Xia Bank is expected to close in the second quarter 2016. This sale, on a pro-forma basis, would have improved Deutsche Bank’s Common Equity Tier 1 capital ratio (CRR/CRD 4 fully loaded) as of 31 December 2015 by approximately 50 to 60 basis points.
All of these amounts are estimates. Details of the preliminary fourth quarter and annual results will be disclosed on January 28, 2016.