Deutsche Bank warns of tough times ahead due to U.S. fine

[October 27, 2016]  By Arno Schuetze and Anjuli Davies

FRANKFURT (Reuters) - Deutsche Bank  chief John Cryan pledged to redouble restructuring efforts on Thursday, warning that it faces tough times finalizing talks with U.S. justice authorities over a multi billion dollar fine.

Germany's biggest lender earlier posted an unexpected quarterly profit, benefiting from a modest rebound in bond trading, but failed to dispel the cloud of uncertainty that drove clients to withdraw billions of euros.

Cryan said on a conference call that the quarter had been overshadowed by talks over the U.S. Department of Justice’s settlement proposal relating to sales of RMBS (residential mortgage-backed securities) which had caused uncertainty.

As well as having an impact on investor and client views of the bank, this uncertainty had also taken its toll on "financial planning and strategy execution", Cryan added.

Cryan warned Deutsche Bank employees in a letter that the situation "will stay difficult for a while" and said he was working to finalize the settlement "as soon as possible".

Deutsche Bank would also intensify a major restructuring to counter a deteriorating environment for banking in Europe and elsewhere, Cryan said.

However, a top ten shareholder called on the bank's management to make deeper cuts in its trading activities. "Fixed income is still oversized in terms of cost and on group level there are still 10,000 staff too many."

Despite weeks of negative headlines, Deutsche was able to announce an unexpected net profit of 278 million euros ($303 million) in the third quarter, lifted by a surge in bond trading that boosted all Wall Street banks.

This sent its shares to a more than one-month high, but they retreated in line with the market to be down 0.3 percent.

Deutsche Bank's Chief Financial Officer Marcus Schenck also struck a positive note, saying he expects the fourth quarter trading business overall to exceed last year's performance.

SPREADSHEET MYTH

Cryan said he was spending at least an hour a day explaining the bank's position to clients, adding: "To dispel any myths, I don't just sit poring over spreadsheets".

Negotiations over a $14 billion demand from the U.S. DoJ for misselling toxic mortgage-backed securities before the 2007-2009 financial crisis have set a bleak backdrop for Cryan.

Thursday's results gave some insight into how this demand has rocked confidence in Deutsche Bank, which plays a critical role in financing some of Germany's biggest companies.

In retail and wealth management, which had assets of almost 440 billion euros, clients withdrew 9 billion euros in the third quarter, Deutsche Bank revealed. Outflows had since abated, it said, although its global markets trading business was also hit.

Cryan said the bank had liquidity reserves of 200 billion euros, a fall from the more than 215 billion he had outlined on Sept. 30. In June, the bank had 223 billion euros.

Deutsche Bank set aside more money for its legal bill for numerous past missteps. Litigation reserves rose to 5.9 billion from 5.5 billion at the end of June.

However, Deutsche Bank has so far not made a specific proposal for what it would be willing to pay to settle the RMBS case and has therefore not upped its provisions for it. It had hoped to settle the case for about $3 billion.

Revenue grew slightly at 7.5 billion euros, ahead of analysts' expectations, mainly driven by Deutsche's trading, while business declined in other operating areas.

"Top down, revenues were stronger and the bank is delivering on costs with this quarter being a fourth consecutive one of declining operating expenses," analysts at Morgan Stanley noted.

Its bond trading, which has volatile earnings and tough capital requirements to meet, revenues were up 14 percent. But the rebound was less pronounced than at peers because of cuts Deutsche has made to the division. Barclays on Thursday reported a 40 percent spike in its business.

In equities trading, Deutsche saw revenue fall as low stock market volatility gave investors less reason to trade, while revenue from corporate and investment banking fell by 1 percent.

($1 = 0.9173 euros)

(Additional reporting by Kathrin Jones; Writing by John O'Donnell; Editing by David Holmes and Alexander Smith)

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