In the third quarter of 2003 the world economy returned to a path of strong growth, led by the United States and Asia. Europe lagged behind, but sentiment indicators all point to a potential recovery. Meanwhile, recent deflationary concerns have receded, resulting in a marked increase of interest rates in the capital markets following the extremely low levels of June. American and European stock markets stabilized, while Asian markets soared.
At Deutsche Bank, we continued to make good progress in transforming our platform, strengthening our franchise and increasing our operating leverage. This progress is reflected in our third quarter results. We reported net income of € 576 million, compared to a loss of € 299 million in the third quarter of 2002. We also saw a further improvement in the quality of our loan book, giving rise to lower provision for credit losses and a further reduction in problem loans.
Total revenues for the quarter were € 5.2 billion compared with € 5.5 billion in the third quarter last year. The underlying growth of our franchise is masked by the strength of the euro, given the high percentage of the bank’s dollar and dollar-linked earnings, which had to be translated into euros for consolidated group reporting, and the sale of several businesses over the last twelve months. Adjusted for these two effects, underlying revenues would have shown an increase of approximately 7% over the third quarter of 2002.
Finally, the asymmetrical accounting treatment of certain risk hedges in non-trading assets and liabilities, which are explained in detail in the discussion section of this Interim Report, had an adverse impact.
In line with the more favourable economic outlook, credit conditions have also improved, although the situation in Germany and other continental European countries remains challenging. Against this backdrop, and thanks to our strong risk management, the provision for credit losses declined for the fourth consecutive quarter to € 191 million, down from a peak in autumn 2002. This decrease reflects the further improvement in the quality of the loan book as well as releases and recoveries which were higher than in previous periods. Problem loans were further reduced by € 1.2 billion, bringing the total reduction since the beginning of 2002 to € 5.5 billion or 43%.
Our BIS Tier I ratio was 9.5%, well above our target range of 8–9%. We took effective steps to strengthen our capital base during the quarter. An issue of € 1 billion of hybrid Tier I securities was very well received by the market; we continued to decrease risk-weighted assets by again reducing our loan book; and we made more progress on the disposal of principal investments. Thanks to this sustained capital discipline, we substantially absorbed the effects of the new U.S. GAAP accounting requirements (SFAS 150), which we described in our last Interim Report. We were also able to launch a further share buy-back program, which will see us repurchase up to 10% of our outstanding shares. In the third quarter, we bought back 5.9 million Deutsche Bank shares.
The Corporate and Investment Bank (CIB) recorded a pre-tax profit of € 751 million, compared with a loss of € 312 million in the same period last year. The improvement was mainly driven by a reduction in noninterest expenses and lower provision for credit losses. Underlying revenues were € 3.3 billion, an increase of 5% compared to the third quarter of 2002.
Sales and Trading revenues were € 2.1 billion, 15% higher than in the third quarter of 2002. This underlines the resilience of CIB’s market activities in equities, debt and other products, and reflects improved sentiment in the market. The decrease in revenues compared to the second quarter of 2003 was partly attributable to seasonal factors, as the traditional slowdown of customer flow activities, particularly observable in European markets, was more pronounced this year.
However, we believe that, going forward, CIB’s emphasis on a customer-focused trading model will generate superior shareholder returns on a risk-adjusted basis in all market conditions.
Private Clients and Asset Management (PCAM) reported a pre-tax profit of € 329 million, a considerable improvement on the € 187 million reported in the third quarter last year.
Within PCAM, Asset and Wealth Management raised its revenues by € 83 million. This increase was mainly attributable to portfolio management, due to higher performance fees and successful product placements, and higher revenues from the real estate business. Private & Business Clients generated stable revenues of € 1.1 billion in this quarter. On the other hand, the division had to absorb materially higher severance payments related to ongoing business integration activities, predominantly in Germany.
In September, I, together with colleagues on the Group Executive Committee, discussed our strategic objectives with analysts and portfolio managers in London and New York. These meetings were very well received. “Phase 1“ of our strategic agenda has been a clear success. We delivered against our stated objectives, as demonstrated by our progress on costs, capital and balance sheet discipline, the rapid disposal of non-core assets, and significant progress in PCAM.
We are also making headway with the objectives of “Phase 2“ of our strategic agenda, which I discussed in my last letter to you. We are maintaining strict discipline with regard to our cost and capital management; our CIB business, globally ranked number three, is consistently improving its position; our PCAM business is delivering continued profitable growth; and our overall franchise, as attested by client validation, demonstrates that we are serious about our objective of establishing Deutsche Bank as the most reputable brand in our peer group.
As you know, our fundamental target is to improve Deutsche Bank’s return on shareholders’ equity. With good progress against our strategic goals and disciplined disposals of non-core assets, we are confident we will deliver on our stated objective of achieving a 25% pre-tax return on equity.
Our third quarter results are strong. We have also delivered a solid and sustained year-to-date performance, with underlying pre-tax profit of € 2.9 billion up by 140% against the first nine months of 2002. This, together with a better global economic environment, gives me and my colleagues great confidence that we can look forward to a full-year 2003 performance which will be very satisfying for our shareholders.
Let me conclude on a personal note. You will have seen from the media that a district court in Germany has allowed legal proceedings against myself and others in relation to the acquisition of Mannesmann AG by Vodafone PLC. I have rejected, and will always reject, any notion of wrongdoing in this issue, and believe that the allegations are without foundation. I would like to add that I have been encouraged and deeply gratified by the overwhelming support I have received in general, but in particular from you, our shareholders, our staff, and, last but not least, existing and new clients. I take this as a clear sign of confidence and trust, not only in me, but also in the bank. And let there be no doubt – I will stay totally focused on the priorities that lie ahead and on creating value for our shareholders.
Yours sincerely,
Josef Ackermann
Spokesman of the Board of Managing Directors and
Chairman of the Group Executive Committee
Frankfurt am Main, October 2003
