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Deutsche Bank (XETRA: DBKGn.DE / NYSE: DB) reported net income of € 680 million in the third quarter of 2004, up 18% from € 576 million in the third quarter of 2003. For the first nine months of 2004, net income was € 2.3 billion, up 145% from € 929 million in the first nine months of 2003. Diluted earnings per share were € 1.28, up 28% from € 1.00 in the third quarter 2003. For the first nine months of 2004, diluted earnings per share were € 4.13, up 166% from € 1.55 in the same period last year.
Josef Ackermann, Spokesman of the Board of Managing Directors and Chairman of the Group Executive Committee, said: “In the third quarter of 2004, Deutsche Bank reported the best third quarter net income since our conversion to U.S. GAAP. In the first nine months of 2004, we have also delivered significant profit growth over the same period last year.”
He added: “We achieved these results despite a business environment which remains very challenging. We continue to reap the benefits of our ‘transformation’ strategy, and our overall performance in this environment was very robust. However, specific business areas were impacted by tough operating conditions, and the management team has taken decisive action to boost performance. In addition, we have strengthened the voice of the regions in our management structure and appointed a dedicated Management Committee Germany. This reinforces our commitment to our all important home market. These actions underscore our determination to meet the ambitious goals we have set ourselves, and to serve the interests of our shareholders.”
Income before income taxes for the third quarter was € 1.0 billion, up 33% from the third quarter 2003, and € 3.7 billion for the first nine months of 2004, up 79% compared to the same period in 2003.
Reported revenues were € 5.1 billion, 2% lower than in the third quarter 2003. Total net interest and trading revenues were € 2.4 billion, a decrease of € 120 million or 5% compared to the third quarter 2003, with the decline primarily due to lower Sales and Trading (Equity) revenues, in part offset by higher net interest and trading revenues in Consolidation & Adjustments. Noninterest revenues excluding Trading revenues were € 2.6 billion, an increase of € 15 million compared to the third quarter 2003. This change resulted from higher Other revenues, including revenues from loans held for sale, revenues from qualifying hedges, and a gain on the sale of land and net insurance reimbursements, the latter both related to the 11 September 2001 terrorist attacks in New York City. This increase was in part offset by lower fee and commission income, mainly brokerage fees on securities activities, and by lower income from equity method investments, which in the third quarter 2003 included gains on the sale of real estate investment assets in Asset and Wealth Management.
Noninterest expenses were just under € 4.0 billion, a decline of 6% compared to the third quarter 2003. This demonstrates the continued success of our cost containment program. Compensation expenses were € 257 million lower than in the third quarter 2003, due in part to a decline in accruals for performance-based compensation, lower severance payments and reductions in headcount. The compensation ratio remained stable at 46% for the third consecutive quarter.
Provision for credit losses, which includes provisions for both loan losses and off-balance sheet exposures (the latter reported in Other expenses), was € 58 million, a decline of 69% compared to the third quarter 2003. This represents the eighth consecutive quarter of declining provision for credit losses and reflects the continued benefits of effective credit risk management and an improved credit environment. Problem loans at the end of the quarter were € 5.4 billion, a decline of 25% from 30 September 2003, and of 18% from 31 December 2003.
In the third quarter 2004 Deutsche Bank pursued its share buyback program, purchasing a further 16 million shares, or 3% of shares issued, for € 919 million. Despite the share buyback program and a redemption of hybrid capital of € 677 million, the BIS core capital ratio of 9.2% at the end of the quarter remained above the target range of 8-9%.
Market risk was managed tightly, with a 23% reduction in value-at-risk during the third quarter, predominantly driven by reduced exposures, principally fixed income positions, and also by improved diversification across business lines.
Business Segment Review
Corporate and Investment Bank Group Division
The Corporate and Investment Bank’s (CIB) third quarter 2004 underlying pre-tax profit was € 555 million, a decline of € 140 million, or 20%, from € 695 million in the third quarter 2003. Underlying revenues of € 2.9 billion were down by € 379 million, or 12%, versus the third quarter 2003. Reported revenues in the third quarter 2003 also included gains of € 59 million from the sale of most of the bank’s global securities services business. The first nine months underlying pre-tax profit was almost identical to the previous year at € 2.5 billion. While underlying revenues for the first nine months were below the same period 2003, most of the decline was due to the effects of unfavorable movements in foreign exchange rates.
Sales and Trading (Debt and other products) generated underlying revenues of € 1.4 billion, up by € 97 million, or 7%, versus the third quarter 2003. The bank’s debt businesses continue to focus on delivering higher-value customized products to clients, in particular through structured interest rate and credit derivatives and securitized products. Flow businesses in foreign exchange and government bonds also experienced a modest recovery in client volumes during the quarter. For the first nine months, underlying revenues were € 5.0 billion, up by € 106 million, or 2%, versus the same period 2003, continuing to benefit from a strong geographical diversity and customer focus.
Sales and Trading (Equity) generated underlying revenues of € 400 million compared to € 745 million in the third quarter 2003. The equity derivative and prime services businesses performed strongly, but continued difficult market conditions adversely affected DB Advisors, the bank’s in-house proprietary trading business. In addition, while the customer flow portion of the convertibles business remained profitable, low volatility and narrowing spreads negatively impacted the convertibles proprietary trading portfolios. Revenues in both DB Advisors and convertibles were significantly below the levels of the third quarter 2003 as was the case in the second quarter 2004 compared to the prior year second quarter. The cash equity business also continued to be impacted by pressure on margins and low volume, particularly in Europe. In the first nine months underlying revenues of € 1.7 billion were € 529 million below the same period 2003 with the same trends highlighted above predominating.
Origination and Advisory generated underlying revenues of € 459 million, essentially unchanged compared to the third quarter 2003. Origination (Debt) revenues continue to show a strong position in higher-growth areas such as corporate bonds, emerging markets and high-yield debt. Origination (Equity) revenues fell compared to the third quarter 2003, reflecting lower levels of activity in the European issuance markets, our area of greatest strength historically. The bank also affirmed its commitment to avoid transactions with inadequate or negative returns. Advisory revenues were essentially unchanged year-on-year. The strength of the advisory franchise was underscored in the third quarter 2004, when Deutsche Bank was ranked among the top three in U.S. M&A by volume of announced deals by Thomson Financial.
Loan Products generated underlying revenues of € 224 million, down by 34% versus the third quarter 2003. This was due in part to additional portfolio management costs, including mark-to-market adjustments on credit risk hedge positions, reflecting tightening credit spreads in the quarter. Revenues were additionally impacted by reduced net interest and fees, as loan volume declined in the bank’s global corporates and mid-cap portfolios. On a year-to-date basis, underlying revenues of € 866 million decreased by € 159 million from € 1.0 billion, mainly as a result of the aforementioned reductions in loan volume.
Transaction Services generated underlying revenues of € 464 million, similar to the third quarter 2003. The decline of € 61 million in underlying revenues in the first nine months of 2004 compared to the same period last year was primarily a consequence of the sale of most of the bank’s global securities services business in 2003. The success of the business was recognized in September when the bank was named “Best House at Cash Management” in the Bank of the Year Awards 2004 according to The Banker magazine.
Provision for credit losses in the third quarter was € 2 million, significantly down from the € 136 million recorded in the third quarter last year, reflecting the benefits of enhanced credit discipline and an improved credit environment. For the first nine months, provision for credit losses totaled € 82 million, compared to € 616 million in the same period in 2003.
CIB’s operating cost base in the third quarter was € 2.3 billion, a 4% reduction from the same quarter last year. This decline was primarily driven by reduced performance-related compensation. For the first nine months, the operating cost base was € 7.6 billion, an increase of € 81 million from the same period of 2003.
Private Clients and Asset Management Group Division
Private Clients and Asset Management (PCAM) generated underlying pre-tax profit of € 344 million in the third quarter of 2004, up 5% from the third quarter 2003. In a difficult market environment, underlying revenues were € 2.0 billion in third quarter 2004, down by 6% from third quarter 2003. The operating cost base was € 1.5 billion, down by € 148 million, or 9%, versus the third quarter 2003. For the first nine months, underlying pre-tax profit was € 1.1 billion, an increase of 37% from the same period 2003. The provision for credit losses for the third quarter of 2004 was € 55 million, € 6 million above the third quarter of 2003.
Asset and Wealth Management (AWM) generated underlying pre-tax profit of € 100 million, a decrease of € 131 million versus the third quarter 2003. Underlying revenues of € 829 million were € 178 million below the third quarter 2003, which included significant revenues from the real estate business, including € 74 million in gains on the sale of certain real estate investments in asset management. Additionally, challenging market conditions and the impact of unfavorable foreign exchange rate movements resulted in significantly reduced brokerage revenues and lower portfolio/fund management revenues. For the first nine months, underlying pre-tax profit was € 391 million, a decrease of € 50 million from the same period 2003. AWM’s operating cost base was € 723 million in the third quarter of 2004. The decline of € 56 million compared to the third quarter 2003 was attributable to reduced performance-based compensation as well as lower non-compensation costs.
Asset Management’s underlying revenues during the third quarter 2004 suffered from lower performance fees in Continental Europe and in the hedge fund business. Net revenues for the prior year quarter benefited significantly from the aforementioned gains on the sale of real estate investments. Net asset outflows in asset management were € 11 billion during the third quarter 2004, largely in the U.K. institutional business. However, the bank continued to see growth in other invested asset classes with net new assets of € 1 billion in the real estate business and € 241 million in the hedge fund business. In the first nine months our German mutual fund company, DWS, further improved its market share of net mutual fund inflows to over 50% as measured by the German Investment Association, BVI.
In Private Wealth Management net underlying revenues declined compared to the third quarter 2003, predominantly caused by the stronger Euro as well as lower brokerage revenues resulting from the ongoing uncertainty in stock markets, which led to a decrease in customer activity.
Private & Business Clients (PBC) generated an underlying pre-tax profit of
€ 243 million in the third quarter of 2004, an increase of € 149 million or 156% compared to third quarter 2003. In the third quarter of 2004, underlying revenues were € 1.1 billion, an increase of € 61 million, or 6%, versus the third quarter of 2003 mainly due to higher loans and deposits revenues, improved revenues from portfolio/fund management products and higher revenues from insurance products (which are reported in Payments, account and remaining financial services). The Deutsche Bank customer satisfaction index improved, which supports prospects for future growth. The operating cost base was € 826 million, a decline of € 92 million, or 10%, versus the third quarter 2003, with most of the reduction attributable to lower severance payments. The underlying cost/income ratio improved to 73%, down 13 percentage points from the third quarter 2003. For the first nine months, underlying pre-tax profit was € 742 million, an increase of 92%, compared to € 386 million for same period 2003, fully in line with PBC’s full-year underlying pre-tax profit target of € 1 billion.
Corporate Investments Group Division
Corporate Investments (CI) generated an underlying pre-tax loss of € 61 million in the third quarter of 2004, essentially unchanged from a loss of € 62 million in the third quarter of 2003. For the first nine months, CI generated an underlying pre-tax loss of € 40 million compared to an underlying pre-tax loss of € 194 million for the same period 2003. The improvement this year reflects the continued success of the strategy to de-risk the bank by reducing its exposure to alternative assets. The third quarter 2004 was the eleventh consecutive quarter of reductions in such exposure, which was € 2.1 billion at 30 September 2004, a 50% reduction from € 4.1 billion at the end of the third quarter of 2003. Underlying revenues were € 18 million in the third quarter of 2004 compared to € 38 million in the third quarter 2003. The decline in underlying revenues included the effect of the deconsolidation of maxblue Americas. Reported net revenues of € 119 million in the third quarter of 2004 included a benefit of € 51 million arising from the sale of land at 130 Liberty Street (the bank’s lower Manhattan premises damaged during the terrorist attacks of 11 September 2001) and from net insurance reimbursements of losses suffered by the bank as a consequence of those terrorist attacks. Revenues in the quarter also reflected net gains from equity method investments and other investments of € 24 million, and net gains related to our industrial holdings portfolio of € 26 million, all of which are excluded from underlying revenues. CI’s underlying revenues in the second quarter 2004 of € 224 million included seasonal dividend income of € 209 million, mainly from our industrial holdings. CI’s operating cost base was € 78 million in the third quarter 2004, including the cost of eliminating excess space, totaling € 20 million, resulting from headcount reductions and the sale of businesses. Similar charges in the third quarter of 2003 amounted to € 36 million. The decrease of € 23 million in the operating cost base from 2003 also reflected reductions resulting from the sale of maxblue Americas as well as project-related costs in 2003.
Consolidation & Adjustments
Consolidation & Adjustments includes adjustments for differences in accounting methods used for management reporting versus U.S. GAAP and adjustments related to activities that are not the responsibility of the business segments.
In Consolidation & Adjustments, income before income taxes was € 46 million versus a loss before income taxes of € 233 million in the third quarter 2003. The improvement reflected lower charges from the effects of asymmetrical accounting for non-trading derivatives used for hedging purposes. These hedges, although economically effective, do not qualify for hedge accounting under SFAS 133. Also contributing to the increase was € 110 million of interest income on tax refunds resulting from ongoing audits of prior period tax returns. For the first nine months, the loss before income taxes was € 163 million in 2004 and € 209 million in 2003.
By their very nature, forward-looking statements involve risks and uncertainties. A number of important factors could therefore cause actual results to differ materially from those contained in any forward-looking statement. Such factors include the conditions in the financial markets in Germany, in Europe, in the United States and elsewhere from which we derive a substantial portion of our trading revenues; potential defaults of borrowers or trading counterparties; the reliability of our risk management policies, procedures and methods; and other risks referenced in our filings with the U.S. Securities and Exchange Commission. Such factors are described in detail in our SEC Form 20-F of 25 March 2004 in the section "Risk Factors." Copies of this document are readily available upon request or can be downloaded from www.deutsche-bank.com/ir.