The second quarter of 2007 was highly successful for Deutsche Bank. After an excellent first quarter, we delivered another outstanding quarterly result, with significant earnings growth over the same period last year. All our business divisions contributed to this growth. As a result, we delivered a very strong first half year, clearly demonstrating the power and resilience of our platform.
During the quarter, volumes of activity in the world’s financial markets remained robust, particularly in Europe and Asia. Nevertheless, concerns persisted over problems related to the sub-prime mortgage market in the United States, and the potential impact of these problems on the wider credit markets, creating a challenging environment in some sales and trading businesses. Financial markets also reflected a more cautious approach by investors in respect of leveraged finance being used to support merger and acquisition activity.
Against this backdrop, Deutsche Bank’s financial performance was very strong. Net revenues for the quarter were € 8.8 billion, up 27 % versus the second quarter of 2006. Pre-tax profit was € 2.7 billion, up 32 %, while net income rose 31 % to € 1.8 billion. Pre-tax return on average active equity was 36 %, up from 33 % in the second quarter 2006, on average active equity which was up by € 5.3 billion, or 22 %, over the prior year quarter. Diluted earnings per share were € 3.60, up 48 %. Per our target definition, which excludes certain significant gains and charges, pre-tax return on equity was 35 %.
This performance contributes to a very successful first half year. For the first six months of 2007, revenues were up 23 % to € 18.4 billion, pre-tax profit up 26 % to € 5.9 billion, and net income up 30 % to € 3.9 billion. Return on average active equity was 40 % and diluted earnings per share rose 41 % to € 7.86. Per target definition, half-year pre-tax return on equity was 38 %.
The Corporate and Investment Bank (CIB) delivered its best-ever second quarter, with pre-tax profits of € 2.0 billion, up 29 % versus the second quarter 2006. In Sales & Trading of Debt and other products, net revenues rose 18 % over the prior year quarter to € 2.9 billion, with very strong performances in credit products and emerging markets debt. We ranked no. 1 globally by second-quarter revenues, reflecting our objective to outperform in challenging markets. In Sales & Trading Equity, revenues of € 1.4 billion were nearly double the prior year quarter. All our customer-oriented businesses – cash equity, derivatives, and prime services – contributed to this excellent result, while designated proprietary trading rebounded versus the second quarter 2006. We also produced best-ever revenues in both origination and advisory, reflecting strong markets for debt and equity issuance and high levels of M&A activity. Origination revenues rose 12 % to € 638 million, while advisory revenues were up 63 % to € 256 million. In Global Transaction Banking, pre-tax profits were up 24 % year-on-year to € 247 million, with strong revenue growth in both Cash Management and Trust & Securities Services. Our commitment to further grow this high-quality business was reflected in our recent acquisition of the institutional custody business of Garanti Bank in Turkey.
Private Clients and Asset Management (PCAM) delivered a very successful quarter. Pre-tax profits were € 588 million, up 19 % versus the second quarter 2006, and up 22 % from the first quarter of this year. This demonstrates the power of the PCAM platform, with substantial and growing earnings momentum together with continued investments in future growth. In Asset and Wealth Management (AWM), pre-tax profits were € 292 million, up 21 % over the prior year quarter, and up 55 % on the first quarter this year. Performance fees in real estate asset management improved significantly from the first quarter, although not reaching the exceptional levels of the second quarter last year, while revenues in retail asset management also grew year-on-year. Revenues in Private Wealth Management grew in all regions, boosted additionally by the acquisition of Tilney in the United Kingdom at the end of last year. Private & Business Clients (PBC) delivered pre-tax profits of € 297 million, up 18 % versus the second quarter 2006. PBC continued to integrate Berliner Bank and norisbank in Germany, and to expand in Poland and key Asian markets – notably India, where we already serve over 300,000 clients. PCAM also captured net new money of € 14 billion during the quarter, bringing PCAM’s total inflows to € 29 billion for the first half of 2007.
We maintained our commitment to tight management of cost and capital. Our cost-income ratio for the quarter was 68 %, compared to 69 % in the second quarter 2006. Risk-weighted assets grew by € 22 billion to € 308 billion during the second quarter, and we repurchased 5.8 million shares, or 1.1 % of shares outstanding; nevertheless, we maintained a core capital ratio of 8.4 %, within our target range of between 8 % and 9 %. In May, we gained recognition of our progress from a very important source: Moody’s, the credit rating agency, upgraded our long-term debt rating by two levels, from Aa3 to Aa1.
Looking forward, uncertainties persist in the world’s financial markets in the short term. Some areas of the credit markets may continue to experience turbulent conditions, and investors may adopt a more conservative stance toward leveraged finance. Our business model which benefits from rigorous risk management and independent control processes is structured to deliver performance also in the face of such challenges. We have consistently adopted a prudent approach to risk-taking, and the current environment is no exception. We firmly believe that these qualities will enable us to continue to perform strongly.
Furthermore, important structural trends continue to support the growth of our business. In the corporate sector, profitability is very solid, and debt levels are relatively low. Investor appetite remains strong, particularly for alternative asset classes. Growth in the world economy remains robust, with strength in Europe and sustained dynamism in key emerging markets.
Deutsche Bank is well placed to perform in this environment. Our global franchise is outstanding, with presence in all major markets and in the important growth regions of the world. Our sales and trading platform is well diversified, and commands leading positions in fast-growing businesses; our corporate finance pipeline remains strong; and we have built solid earnings momentum in our ‘stable’ businesses, Global Transaction Banking and PCAM. Therefore, we remain firmly convinced of the considerable long-term growth potential of our platform.
Yours sincerely,
Josef Ackermann
Chairman of the Management Board and
the Group Executive CommitteeFrankfurt am Main, August 2007
