In the second quarter of 2006, Deutsche Bank delivered strong results in challenging markets. After the favorable environment of the first quarter this year, the world’s financial markets experienced more volatile conditions during May and June, reflecting inflationary pressures and prospects of higher interest rates in the global economy, together with ongoing geopolitical uncertainties. These concerns led to corrections in the world’s leading equity markets and sustained pressure on some emerging market stock exchanges. Despite these challenges, Deutsche Bank produced a second-quarter performance which was significantly ahead of the same period in 2005 and, as a result, an outstanding first half year.
Net revenues for the second quarter were € 6.8 billion, up by 15% versus the second quarter of 2005. Income before income taxes rose 32% to € 1.9 billion, and net income by 29% to € 1.2 billion. Pre-tax return on average active equity, per target definition, was 29%, compared to 25% in the second quarter of last year, while diluted earnings per share rose 14% to € 2.17. For the first half 2006, revenues were up 18% to € 14.8 billion, income before income taxes rose by 40% to € 4.5 billion, and net income by 43% to € 2.9 billion. Pre-tax return on average active equity, per target definition, was 35% compared to 29% in the first half of 2005, while diluted earnings per share were € 5.57.
The Corporate and Investment Bank (CIB) recorded its best-ever second quarter, with underlying pre-tax profits rising 65% to € 1.4 billion. In difficult markets, our sales and trading business delivered solid year-on-year growth. Sales & Trading (debt and other products) produced record second-quarter results, with revenues rising 46%, driven by very strong advances in credit trading and healthy levels in our customer flow businesses, including foreign exchange, money market and rates. Sales & Trading (equity) grew by 23% versus the second quarter last year, with strong performances in cash equities, equity derivatives and prime services. Against a backdrop of corrections in global equity markets, our equity proprietary trading unit gave up some of the gains recorded during the exceptionally strong first quarter, resulting in a second-quarter trading loss. Nevertheless, equity proprietary trading remained solidly positive for the first half year. Businesses acquired last year, United Financial Group in Russia and Bender Securities in Turkey, are now fully integrated into our platform.
Our Corporate Finance business delivered significant growth, with origination and advisory revenues up 33%, due principally to strong momentum in equity and debt origination, while Global Transaction Banking produced its best-ever quarterly underlying profits, up 81% compared to the second quarter 2005.
Private Clients and Asset Management (PCAM) continued to make strong progress, with underlying pre-tax profits of € 490 million, up 32% over the second quarter 2005. Asset and Wealth Management’s underlying pre-tax profits rose 67%, reflecting performance fees in real estate asset management, whilst Private Wealth Management continued to attract inflows of customer money. In our Private & Business Clients (PBC) business, underlying pre-tax profits rose 14% to € 281 million, despite the costs of ongoing investments, notably in India and the expansion of the branch network in Poland. PCAM’s continued earnings growth reflects the success of our efforts to optimise this business, which now contributes a sizeable, high-quality earnings stream for Deutsche Bank.
We have committed to growing our core businesses both by organic investment and by focused incremental acquisitions and I am pleased to report successful acquisitions by both CIB and PCAM. We strengthened our PBC business in Germany with the agreement to acquire Berliner Bank, which we announced in June. Berliner Bank is an excellent fit with our own network, and boosts our presence in Germany’s capital city by the addition of 60 modern branches and 320,000 customers whose profile complements our existing client base. We also strengthened CIB’s sales and trading businesses with our acquisition of MortgageIT, announced in early July. This fast-growing U.S. mortgage originator offers highly profitable synergies with Deutsche Bank’s world-leading securitization platform, boosts our position in the all-important North American market, and underscores our commitment to high-quality, innovative products and services. These transactions demonstrate our willingness to grow by acquisition, but only where we see compelling strategic logic and value for our shareholders.
Risk management remained tight during the quarter, with problem loans falling to the lowest level for more than five years. Our capital management continued to meet our primary objectives: well-funded business growth, superior returns to our shareholders, and capital strength. We supported business growth by increasing risk-weighted assets by € 6 billion, whilst also repurchasing 12.3 million shares for a consideration of € 1.1 billion. Simultaneously, we recorded a Tier 1 capital ratio at 8.7%, comfortably within our target range of between 8% and 9%.
We were very pleased to see many of you in attendance at our last Annual General Meeting. Shareholders representing 41% of our equity attended or were represented at this year’s meeting. You approved our proposed dividend for 2005, of € 2.50 per share, which represents a near-doubling in three years, and underlines our commitment to an attractive dividend policy. Management also received shareholders’ approval for a new share buyback program, with authorization to repurchase up to 10% of outstanding shares, which we launched immediately, replacing the previous program. This allows us continued flexibility in capital management, and an additional option of returning capital to shareholders.
After an outstanding first half of 2006, my colleagues and I are very confident of Deutsche Bank’s prospects for continued growth and success in the future. In the first quarter of this year, we demonstrated outperformance in good markets; in the second quarter, we proved our ability to deliver in challenging conditions. We have built leading franchises in those areas where we compete. In both developed and emerging markets across the world, we are well-placed in areas of long-term strategic potential. Continuing uncertainties over the sustainability of economic growth, fuelled by concerns over higher inflation, may impact financial markets and business activities. However, given our strategic positioning, the strength of our platform and the broad diversification of our business portfolio, we remain convinced of the favorable mid and long term prospects for Deutsche Bank.
Yours sincerely,
Josef Ackermann
Chairman of the Management Board and
the Group Executive Committee
Frankfurt am Main, August 2006
