The second quarter of 2008 proved to be another very challenging quarter for the banking industry. After stabilizing in April, markets again deteriorated during June, with the result that the first half-year of 2008 turned out to be one of the most difficult for many years. In the U.S., house prices continued to decline, impacting the wider economy. Inflation in food and other essential commodities lead to growing concerns, and by the end of June the price of oil had risen 46 % since the start of the year. In the banking sector, conditions for credit and liquidity remained tight, while the banks most directly affected by the credit crisis came under pressure to replenish their capital base. Equity markets also weakened substantially toward the end of the quarter.
Deutsche Bank reported second-quarter net income of € 645 million, or € 1.27 per share (diluted) – well below the second quarter of 2007, but a marked improvement from our first quarter this year. The environment continued to affect the performance of our investment banking business, but our ‘stable’ businesses again proved their resilience. In Private Clients and Asset Management, we attracted € 10 billion of net new money, and managed invested assets of € 898 billion at the end of the quarter. We also maintained our capital strength and made significant progress on reducing key exposures. A year has now passed since the beginning of the credit downturn, and over this period, Deutsche Bank has earned a total of € 3.1 billion in net income. We have shown our strength in difficult conditions.
Our Corporate Banking & Securities business reported a pre-tax loss of € 311 million in the second quarter, after mark-downs of € 2.3 billion on legacy positions in areas particularly affected by market conditions. However, other sales and trading businesses held up well, with foreign exchange and interest rate trading producing revenues which were above the second quarter 2007. Corporate Finance revenues were significantly lower than in the second quarter 2007, primarily reflecting lower equity issuance and M&A. Nevertheless, the quality of our client franchise remains a vital asset. For the first half year, we were ranked fourth globally as measured by volume of announced M&A transactions, and at the annual Euromoney awards, we were named Best Investment Bank in Western Europe, together with a clutch of other awards. We are committed to gain market share.
Our ‘stable’ businesses once again performed well. Global Transaction Banking (GTB) produced pre-tax profits of € 283 million, up 15 % despite the adverse impact on our revenues of a weakening U.S. Dollar and lower interest rates. In early July, we also announced the acquisition of parts of the Dutch commercial banking business of ABN AMRO. This move gives us a top-four position in commercial banking in the Netherlands. We expect to complete the transaction in the fourth quarter of this year.
Our Asset and Wealth Management (AWM) business produced pre-tax profits of € 242 million, versus € 292 million in the second quarter 2007, reflecting lower management and performance fees as a result of declining equity values. Nevertheless, AWM attracted € 8 billion in net new money flows during the quarter, bringing its half-year total to € 15 billion.
Private & Business Clients (PBC) produced pre-tax profits of € 328 million, up 11 %. Revenues in brokerage and other investment products were lower than in the second quarter 2007, reflecting more difficult markets; however, this was in part counterbalanced by strong revenues in consumer finance and deposit products, and tight control of expenses. PBC produced strong revenue growth in growth markets including Poland and Asia. PBC also gathered net new money of € 3 billion during the quarter, bringing its half-year total to € 7 billion.
Taken together, these ‘stable’ businesses produced pre-tax profits of € 854 million for the quarter, higher than the second quarter 2007, while for the first half year, pre-tax profit was € 1.6 billion. These businesses have demonstrated earnings power in difficult markets, and our strategy of building them has paid off.
We also reaped the benefits of rigorous cost, risk and capital management. Our noninterest expenses were down 23 % in the quarter, and 24 % in the first half year. Our BIS Tier 1 Capital ratio, the key measure for the capital strength of a bank, was 9.3 % at the end of the quarter, well above our target range of 8-9 %. We continued to make dividend accruals at the same level as last year, and have thus made accruals of € 2.25 per share in the first six months of 2008. We also made significant progress in reducing our risk exposures. We reduced our leveraged finance exposure by € 5.7 billion to € 24.5 billion, taking advantage of improving market prices, and continued to make progress in early July. We reduced our commercial real estate exposure by € 3.7 billion, and we took mark-downs which reduced our exposure to monoline insurers and residential mortgage-backed securities. By the end of the first half year, we had raised € 40 billion of funding with maturities in excess of one year. We also reduced total assets by € 159 billion, to € 1,991 billion, by the end of the quarter.
Faced with a challenging near-term environment, Deutsche Bank has clear priorities. We will continue to strictly manage cost, risk and capital, and to reduce our exposures in key areas. We will seek opportunities to gain market share by capitalizing on our relatively robust performance through the current downturn. In investment banking, we will continue to build our client franchise. We will capitalize on the momentum of our ‘stable’ businesses. We will continue to invest in all our core businesses, both organically and by acquisition, but we will not relax our discipline. The cost of any investment must be justifiable in terms of the value created for our shareholders. Having already built leadership positions in our core businesses, we are under no pressure to make acquisitions. This holds true for our business across the world – and our home market, Germany, is no exception.
Looking forward, we remain cautious for the remainder of 2008. Volumes in some trading businesses have returned to solid levels, and regulators, central bankers, governments and the banking industry have proved their determination to take corrective action. The economies of important developing and energy-producing nations remain robust. However, in the U.S., sustained weakness in the housing market, a slowing economy, rising unemployment and inflationary pressures all negatively influence the outlook. In the world’s capital markets, both issuers and investors remain wary, and liquidity remains a challenge for the banking industry. In this environment, share prices of banking stocks across the board have come under intense pressure. Unfortunately, Deutsche Bank has not escaped this trend. Nevertheless, my recent conversations with large investors around the world reinforce my conviction, that Deutsche Bank’s franchise is correctly positioned to create long-term value for shareholders.
Yours sincerely,
Josef Ackermann
Chairman of the Management Board and
the Group Executive Committee
Frankfurt am Main, July 2008
