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January 20, 2014 9:12 pm
Shareholder concern over Deutsche Bank’s multibillion-euro litigation risks has been heightened after the German lender was forced to reveal deep quarterly losses, partly triggered by higher legal provisions.
Shares in the European financial services group dropped 5.4 per cent after the bank revealed on Sunday that it had lost nearly a billion euros in the final quarter of the year. This reflected a downturn in its fixed-income trading but also litigation and restructuring costs as Deutsche Bank struggles to put its past behind it.
Senior executives at the bank have sought to convince investors that the lender has enough cash earmarked in its remaining €2.3bn litigation pot to face further expected payouts. Unlike many of its peers, Deutsche has not yet faced a fine from US and UK regulators in relation to the Libor rate-rigging scandal, which is seen as a threat hanging over the bank this year.
But investors told the Financial Times that they were still concerned. One top 10 shareholder said: “Litigation risk is a big concern. This is one of the big uncertainties hanging over Deutsche Bank. Just look at JPMorgan and the cost of restitution in the whale case and the risks are obvious and great.”
Another top 10 investor said that the German lender could have to add as much as €2bn to its litigation pot this year amid a string of legacy as well as fresh investigations in the banking sector.
Regulators around the world are looking into possible manipulation of the foreign exchange market across lenders, where Deutsche has suspended a number of traders. Regulators in Germany are also looking into possible manipulation of the gold and silver market. No charges have been brought in either affair and Deutsche Bank has not been accused of any wrongdoing.
Analysts at JPMorgan estimate that Deutsche will have to add a further €1.5bn to its litigation reserves this year.
Deutsche Bank is in the process of shrinking its balance sheet by a further €250bn in the next two years as it tries to comply with stringent new regulations in the banking sector and become more profitable.
Anshu Jain and Juergen Fitschen, the two co-chief executives of Deutsche who took the helm in 2012, have promised cultural change at the lender, which has seen its reputation blemished along with other banks in the wake of the global rate-rigging Libor scandal. Deutsche forked out €725m last year for its role in the rigging of Euribor and yen Libor bank lending rates.
Mr Jain repeated a request for patience from investors on Monday, warning that 2014 was likely to be another “transitional year” that would see further costs in litigation, restructuring and weakness in the bank’s flagship fixed-income business.
Net loss in 2013 Q4
Analysts’ expectations for net profit in 2013 Q4
Litigation expenses for 2013. Reserves for litigation are €2.3b
Investment banking net revenues in 2013 Q4
Revenues from debt trading slumped 31 per cent in the fourth quarter of the year, underperforming the decline at some of the European bank’s Wall Street counterparts.
Another top 10 shareholder said: “These are poor figures. This is a bank in trouble. But I think we have to tough this out further. I don’t think investors should cut and run at this stage. They should be prepared to give the bank more time to improve performance.”
Investors were also more forgiving of the lender after it rushed out its fourth-quarter results on Sunday evening a full 10 days ahead of schedule, amid reports the previous week that the bank could be forced to issue a profit warning.
One top 20 shareholder said: “Maybe it would have been good to have had an earlier warning, but these are still difficult times for the banks. I don’t think we can underestimate how difficult this environment is for banks, even if they have brought some of the problems on themselves.”
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