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Deutsche Bank (XETRA: DBKGn.DE / NYSE: DB) reported net income before reversal of 1999/2000 credits for tax rate changes for the second quarter 2004 of € 749 million, up 27% from € 588 million in the second quarter 2003. For the first six months of 2004, net income before reversal of 1999/2000 credits for tax rate changes was € 1.7 billion, up 330% from € 399 million in the first half 2003.
Net income in the second quarter 2004 was € 656 million, up 15% from the second quarter 2003, and diluted earnings per share were € 1.16, up 25% from 93 cents in the second quarter 2003. Net income in the first half 2004 was € 1.6 billion, an increase of 353% compared to the first six months 2003, and diluted earnings per share were € 2.83, up 396% from 57 cents in the first six months of 2003.
Josef Ackermann, Spokesman of the Board of Managing Directors and Chairman of the Group Executive Committee, said: “The challenging business conditions in the second quarter impacted our revenues. However, we turned in a solid result due to the enhanced operating strength of our platform after the transformation of the bank. This allowed us to close the first half of 2004 with substantial growth in profitability, and returns to our shareholders.”
He added: “In the Corporate and Investment Bank, revenues were substantially lower in convertibles trading, reflecting difficult market conditions. Our other customer-driven sales and trading businesses performed well. An emphasis on providing clients with high-value structured products and intellectual leadership has yielded substantial results. Revenues in our origination and advisory businesses were the best for six quarters.
In Private Clients and Asset Management, we continued to reap the benefits of the reengineering efforts of the last two years, with profitability significantly ahead of 2003. Private & Business Clients continued to deliver on a demanding target, with half-year underlying pre-tax profit of € 499 million.
We have published clear, ambitious objectives, and despite the current challenging conditions, we remain absolutely focused on meeting these objectives. To achieve this we will rely on the efficiency of our platform, the strength of our franchise, and the growth potential of our core businesses.”
Reported net revenues were € 5.4 billion, a decline of 9% compared to the second quarter 2003. Almost half of this decline was attributable to three specific factors: the effect of currency movements; the impact of business deconsolidations; and the significant benefit in 2003 (reported in Consolidation and Adjustments) of the asymmetrical accounting treatment of positions in the bank’s own stock. The remaining decline was driven principally by convertible bonds trading where market conditions were very challenging. Nevertheless, taken together, Deutsche Bank’s other customer-driven businesses performed well in the second quarter 2004.
Noninterest expenses were € 4.1 billion, a decline of 9% compared to the second quarter 2003. This is the lowest level since Deutsche Bank’s conversion to U.S. GAAP in 2001 and demonstrates the impact of the ‘transformation’ strategy. Compensation expenses were € 312 million lower than in the second quarter 2003, reflecting a decline in accruals for performance-based compensation, lower severance payments and reductions in headcount.
Provision for credit losses, which includes provisions for both loan losses and off-balance sheet exposures (the latter reported in Other noninterest expenses), was € 83 million, a decline of 75% compared to the second quarter 2003. This represents the seventh consecutive quarter of declining provision for credit losses, and reflects Deutsche Bank’s commitment to disciplined credit risk management. In a more favorable credit environment, Deutsche Bank improved asset quality. Problem loans were € 5.9 billion, a decline of 30% from 30 June 2003, and of 12% from 31 December 2003.
Income before income taxes for the second quarter was € 1.2 billion, up 6% from the second quarter 2003, and more than doubled to € 2.7 billion for the first half of 2004 compared to the first half of 2003.
Capital management remains disciplined and focused. During the quarter, the bank continued its share buyback program, and announced the cancellation of 38 million shares. The bank also announced that buybacks will continue, and increased its dividend by 15% to € 1.50 per share. Despite the momentum of returning capital to shareholders, the core capital ratio of 9.4% remained comfortably above the top of the target range of 8-9%.
Pre-tax return on average active equity increased to 18% for the quarter, up from 15% in the second quarter 2003. For the first half of 2004 the return increased to 21% from 9% in the first half of 2003.
The sale of DB Payments, part of the bank’s payment processing operations, was recognized in the second quarter of 2004 and the bank simultaneously entered into an agreement with the purchaser to provide the bank with payment processing services. A loss of € 49 million was recognized on the sale, half of which was charged to each of the Global Transaction Banking and Private & Business Clients divisions.
Business segment review
Corporate and Investment Bank Group Division
The Corporate and Investment Bank’s (CIB) second quarter 2004 underlying pre-tax profit was € 762 million, down from € 854 million in the second quarter 2003. Underlying revenues were 12% lower than the second quarter of 2003. For the first half of 2004 underlying pre-tax profit in CIB was € 1.9 billion, an increase of 6% compared to the first half of 2003. Underlying revenues were marginally down, at € 7.2 billion, for the half year compared to € 7.4 billion for the first half of 2003, mainly due to a decline in sales and trading (equity) revenues. Adjusted for the impact of foreign currency movements and business deconsolidations (which would reduce first half 2003 underlying revenues by € 336 million), underlying revenues would have increased by 3%. Reported revenues in the first half of 2003 included a gain of € 508 million from the sale of most of the bank’s global securities services business, which is excluded from underlying revenues.
Sales and Trading (Equity) generated underlying revenues of € 535 million in the second quarter of 2004 compared to € 910 million in the second quarter 2003. The decline was mainly attributable to continuing difficulties experienced by the bank’s convertibles business in a market where volatilities remained at historically very low levels against a backdrop of rising interest rates. These factors also negatively impacted the performance of DB Advisors, the bank’s in-house structured trading business. The bank’s prime services and derivatives businesses registered substantial growth in the second quarter compared to the same period last year while the revenues of the bank’s cash, program trading and index arbitrage businesses remained comparable with the same quarter last year. For the first half of 2004 underlying revenues were € 1.3 billion compared to € 1.5 billion in the first half 2003 with the bank’s cash, derivatives and prime services businesses all posting improved revenues compared to the first half of last year.
In Sales and Trading (Debt and other products) second quarter 2004 underlying revenues were 7% below the second quarter 2003 with a continuing downturn in volumes in the traditional flow businesses, but with sustained revenues and increased volumes in the higher value structuring businesses. Underlying revenues for the first half of 2004 were € 3.5 billion, approximately the same as for the first half of 2003. Given the increasingly difficult market conditions this performance reflects the continued strength of the bank’s franchise in debt and other products. Deutsche Bank was furthermore elected World’s Best Risk Management House and World’s Best Foreign Exchange House by Euromoney magazine.
In Origination and Advisory, second quarter 2004 underlying revenues were € 470 million, the best level in the past six quarters. Announced M&A volumes fell during the second quarter, but we reported increased advisory fees compared to the first quarter of 2004, improving the bank’s positions in European and US league tables, and consolidating the bank’s leading position in Germany. For the first half of 2004 underlying revenues were € 925 million, up 10% from € 843 million in the first half of 2003 and reflecting an improved performance from the bank’s equity capital markets business, which maintained its market position in Europe while improving in Asia. The bank has reinforced its leading position in European high-yield debt issuance and risen to first place in the European leveraged loan market.
Second quarter underlying revenues from Loan Products were down 16% to € 259 million compared to the second quarter 2003, due mainly to lower loan levels and also to a special charge in an equity method investment in the leasing portfolio, offset partly by lower charges related to the bank’s loan hedging activity. As a result, for the first half of 2004 underlying revenues of € 642 million were down 7% from the first half 2003.
In the second quarter 2004 underlying revenues from Transaction Services were € 460 million, a decrease of 3% from the second quarter 2003. This decline reflects lower revenues as a consequence of the sale of most of the bank’s global securities services business in 2003. Underlying revenues for the first half of 2004 were € 954 million, a decline of 5% from the first half of 2003, also because of the aforementioned sale of most of the bank’s global securities services business. Global Transaction Banking’s (GTB) reported revenues for the second quarter of 2004 reflected a charge of € 25 million, which represents GTB’s share of the loss on the sale of DB Payments.
CIB’s provision for credit losses for the second quarter of 2004 was € 7 million, significantly down from € 249 million in the second quarter 2003, reflecting the overall improved macroeconomic conditions. Despite the still-challenging credit environment in the bank’s home market, provisions came down as a result of the enhanced credit discipline that the bank has introduced in recent years. For the first half of 2004, provision for credit losses totaled € 79 million compared to € 481 million in the first half of 2003.
For the second quarter of 2004 CIB’s operating cost base was € 2.5 billion, down 4% compared to the second quarter 2003. This decrease was driven principally by a reduction in performance-based compensation consistent with the decrease in business results quarter-on-quarter. For the first half of 2004, the operating cost base rose by 3% to € 5.3 billion compared to the same period of 2003, again largely reflecting the impact of performance-based compensation in line with CIB’s improved overall results for the first half of 2004.
Private Clients and Asset Management Group Division
Private Clients and Asset Management (PCAM) reported underlying pre-tax profit of € 380 million in the second quarter of 2004, an increase of 40% from the second quarter 2003. Underlying revenues of € 2.0 billion remained stable in a more difficult market environment, while the operating cost base decreased by € 110 million, or 7%, to € 1.5 billion compared to the second quarter 2003. For the first half of 2004 underlying pre-tax profit was € 790 million, an increase of 58% from the first half 2003. Provision for credit losses for the second quarter of 2004 was € 66 million, which was largely in line with the second quarter of 2003.
Private & Business Clients (PBC) generated an underlying pre-tax profit of € 244 million in the second quarter of 2004. Reported pre-tax income was lower by € 25 million, which represented PBC’s share of the aforementioned loss from the sale of DB Payments. These results demonstrate that PBC is on track to deliver on its demanding full-year target of underlying pre-tax profit of € 1 billion. In the second quarter of 2004 underlying revenues of € 1.1 billion were in line with the second quarter 2003, which included a € 55 million gain on the sale of securities available for sale. In 2004 the benefit of this gain was replaced by higher revenues from loan and deposit products due to improved margins, and to growth in loan volumes. The operating cost base of € 796 million was down € 89 million, or 10%, compared to the second quarter 2003, with most of the reduction attributable to lower severance payments. The underlying cost/income ratio improved to 72%, down 7 percentage points from the second quarter 2003. For the first half of 2004 underlying pre-tax profit was € 499 million compared to € 291 million for the first half of 2003.
Asset and Wealth Management (AWM) reported an underlying pre-tax profit of € 136 million in the second quarter of 2004 compared to € 108 million in the second quarter of 2003, an increase of 26%. Underlying revenues of € 847 million remained slightly below the second quarter 2003. For the first half of 2004 underlying pre-tax profit was € 291 million, an increase of € 82 million from the first half 2003. During the second quarter, portfolio/fund management revenues in Asset Management suffered from lower performance fees because of continued difficult market conditions in certain countries in Continental Europe and market corrections that impacted the bank’s hedge fund business. Additionally, revenues were affected by shifts in the UK institutional market away from large-scale balanced portfolios. Invested assets within Asset Management declined by € 15 billion, or 2% from the first quarter 2004. Net assets outflows accounted for € 8 billion of this decline, largely a result of a € 5 billion decline in our institutional distribution channel. We continue to see growth in our alternative investment business with a positive € 1 billion in net new assets. The decline in revenues in Asset Management was partially offset by higher portfolio/fund management revenues in Private Wealth Management, which benefited from higher invested asset levels generated by net new money inflows. Revenues from other products in the second quarter 2004 included a gain from the sale of collateral obtained on a defaulted loan. AWM’s operating cost base was € 711 million in the second quarter of 2004. The decline of € 21 million compared to the second quarter 2003 was mostly attributable to reduced performance-based compensation.
Corporate Investments Group Division
Corporate Investments (CI) reported an underlying pre-tax profit in the second quarter of 2004 of € 128 million, compared to € 30 million in the second quarter of 2003. For the first half of 2004 underlying pre-tax profit was € 20 million compared to a pre-tax loss of € 132 million for the first half 2003. The improvement this year reflected the success of the strategy to de-risk the bank by reducing its exposure to alternative assets. This is evidenced by a 56% reduction in CI’s alternative assets to € 2.3 billion at 30 June 2004 compared to € 5.2 billion at the end of the second quarter of 2003. Underlying revenues were € 224 million in the second quarter of 2004 compared to € 265 million in the second quarter 2003. Both quarters included dividend income of approximately € 200 million from the bank’s industrial holdings portfolio. The decline in underlying revenues includes the effect of the deconsolidation of Tele Columbus and maxblue Americas, which together contributed combined net revenues of € 51 million in the second quarter of 2003. Reported net revenues of € 276 million in the second quarter of 2004 included net gains from the sale of industrial holdings of € 100 million, net losses from equity method investments and other investments of € 57 million, and net gains related to businesses sold of € 8 million. All of these items are excluded from underlying revenues. CI’s operating cost base was € 89 million in the second quarter 2004, including the cost of eliminating excess space resulting from headcount reductions and the sale of businesses totalling € 39 million. Similar charges in the second quarter of 2003 amounted to € 55 million. The decrease of € 141 million in the operating cost base from 2003 also reflected reductions resulting from the sale of Tele Columbus and maxblue Americas as well as project-related costs in 2003.
Note regarding use of “Net income before reversal of 1999/2000 credits for tax rate changes”
Management believes that “Net income before reversal of 1999/2000 credits for tax changes” provides a more useful indication of the bank’s financial performance for the reasons described below. Deutsche Bank’s reported “Net income” is impacted by the US GAAP accounting treatment of German tax law changes in 1999 and 2000. The accounting treatment, and the tax law changes, which exempt from income taxes the capital gains on eligible equity securities, are explained in greater detail on pages 4 to 5 of our Financial Report 2003 and pages 73 to 75 of our SEC Form 20 F of 25 March 2004, which should be read in conjunction with this explanation. This accounting treatment requires the recognition of an income tax charge (the “Reversal of 1999/2000 credits for tax rate changes”) on certain capital gains during the period in which the eligible equity securities are sold, even though such gains are exempt from tax. The charge has no economic effect, and, therefore, does not fully reflect our results.
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.
Excerpts from the Interim Report (Tables B1-B7) - PDF / 115KB