Prudent front at Deutsche Bank

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Josef Ackermann is out to defy the sceptics again, after re-committing Deutsche Bank to its ambitious profit targets for this year. The chief executive of Germany’s largest bank has a track record of proving the nay-sayers wrong.

Deutsche made it through the fourth quarter of 2007 with negligible writedowns on subprime securities and leveraged loans, and made €6.5bn ($9.4bn) of net income last year.

Germany’s largest bank is confident of making at least €8.4bn in the current financial year – a target set nearly two years ago and one that looks increasingly ambitious given the anticipated slowdown in the capital markets that have hitherto propelled Deutsche’s rise.

The bank’s performance this year should give investors a degree of comfort. Deutsche responded quickly as the subprime crisis took hold. It scaled back its sub-prime portfolio from €10bn to €1bn during the third quarter, taking a 5 per cent writedown. Moreover, write-downs on another vulner-able area – leveraged finance – have so far been limited to around €760m.

Mr Ackermann suggests the fact that these losses are small by comparison with competitors is design, not luck. “We were absolutely confident that our macro-economic assessment was correct and that the market was not going to bounce back,” he says. “In July we said – ‘out, exit’.”

The bank’s models for assessing the valuation of its securities also look conservative. It made an €80m profit on the sale of €5.1bn of leveraged loans in the fourth quarter, a move that helped trim writedowns on such assets to only €44m. That may be reassuring given the bank still has €36bn of leveraged loans on its books.

The bank has also been disciplined on costs. Its compensation ratio – which measures pay and benefits as a percentage of revenues – was 44 per cent in the fourth quarter and 43 per cent for the year.

Will these qualities be sufficient to deliver growth this year? Deutsche is dominated by its investment bank and it will need this side of the business to continue to grow.

Michael Cohrs, who runs the advisory and corporate finance side business, says Deutsche should benefit as the economic slowdown in the west makes companies consider gaining exposure to other geographies through mergers and acquisitions. The bank’s historic strengths in distressed debt, and advising companies on balance sheet repair, might also generate revenues in a tougher environment.

“There are some large deals that are not publicly announced that we are working on,” he says.

Anshu Jain, who heads Deutsche’s markets business, says that while industry-wide fixed-income revenues may slip this year, Deutsche is benefiting from higher trading volumes as investors shift their business to banks that have proved their solidity as counterparties. “Volatility for us is a good thing,” he says.

All the same, analysts are sceptical that these businesses can truly flourish in such a tricky environment.

Of course, if Deutsche fails to deliver growth, it always has the option of striking a deal with a competitor.

Mr Ackermann on Thursday played down such suggestions – and specifically ruled out a bid for troubled French rival Société Générale.

“I’m not a strong believer in wholesale mergers,” he said. “Maybe it’s not bad just to stay the course and deliver what you’re promising.”

The pressures of the coming year will put that resolve to the test.

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