Dr. Josef Ackermann, Chairman of the Group Executive Committee, said: "In the second quarter 2005, Deutsche Bank turned in a very strong performance, proving the resilience of our business model and continued tight discipline of costs and capital. Once again, we achieved substantial year-on-year growth in revenues, profitability and returns to our shareholders. Over the first six months of 2005, we have delivered consistently, even in inconsistent markets. The result is an outstanding half year."
"Our strong performance in the first half of 2005 allows us to plan for a substantial increase in our dividend for the current year. In addition, we have resumed our share buybacks," he added.
Net revenues for the second quarter were € 5.9 billion, up 9% compared to € 5.4 billion in the second quarter 2004. Origination and Advisory revenues were up 17%. Revenues in Debt Sales & Trading were in line with last year's second quarter levels, while revenues in Equity Sales & Trading grew 12% over the second quarter 2004. Net revenues in Private Clients and Asset Management (PCAM) grew 4% over the second quarter 2004. For the first half year, Group net revenues grew 8% to € 12.5 billion.
Provision for credit losses, which include provisions for both loan losses and off-balance sheet exposures (the latter reported in noninterest expenses), was € 80 million in the second quarter, essentially unchanged from the prior year period and from the first quarter 2005. For the first half, provision for credit losses fell by 28% versus the first half of 2004. Problem loans further declined to € 4.6 billion, from € 4.8 billion in the first quarter 2005, and the ratio of problem loans to loans fell to 3.2%, from 3.3% in the first quarter 2005. This represents the lowest level of problem loans for five years and reflects strong loan book quality and a favourable credit environment.
Noninterest expenses for the quarter were € 4.4 billion, compared to € 4.1 billion in the second quarter 2004. In the current quarter, noninterest expenses included restructuring expenses of € 116 million. For the first half, noninterest expenses were € 9.1 billion, compared to € 8.5 billion in the first half of 2004, after restructuring expenses of € 284 million. The operating cost base, which excludes restructuring charges and other items, was € 4.3 billion for the quarter, up 4% versus the second quarter 2004 but down 6% from the first quarter 2005. For the first half year, the operating cost base rose 3% to € 8.8 billion. Performance-related compensation costs rose in the second quarter and first half compared to the same periods in 2004, reflecting improved results. Second quarter compensation costs nevertheless declined from the first quarter 2005. Non-compensation operating costs for the second quarter 2005 were essentially unchanged compared to the second quarter 2004, and for the first half year were down 2%.
Income before income taxes was € 1.4 billion, after restructuring expenses of € 116 million, up 22% compared to € 1.2 billion in the second quarter 2004. For the first half year, income before income taxes was up 17% to € 3.2 billion, after restructuring expenses of € 284 million, compared to € 2.7 billion in the first half of 2004. Pre-tax return on average active equity was 23% in the second quarter. The negative impact of restructuring expenses on this ratio was 2 percentage points. For the first half 2005, pre-tax return on average active equity was 27% after a negative impact from restructuring expenses of 2 percentage points.
Net income for the quarter was € 947 million, up 44% compared to € 656 million in the second quarter 2004. For the first half, net income rose 28% to € 2.1 billion, compared to € 1.6 billion in the first half of 2004.
The effective tax rate for the second quarter was 33%, compared to the 36% in the first quarter, excluding the tax reversal effect. The reduction of the tax rate was primarily caused by the release of tax contingency reserves due to resolution and restructuring of some of the bank's tax positions. Excluding the tax reversal effect, the effective tax rate for the first half of 2005 was 35%.
Diluted earnings per share were € 1.90 for the second quarter, up 64% compared to € 1.16 in the second quarter 2004. For the half year, diluted earnings per share rose 43% to € 4.06, compared to € 2.83 in the first half of 2004.
Tier 1 capital ratio was 9.1% at the end of the second quarter, above the bank's target range of 8%-9%. Average active equity in the quarter reflected an increased deduction for the planning of a higher 2005 dividend accrual. Additionally, Deutsche Bank announced the launch of a fourth share buyback program.
The Business Realignment Program progressed on schedule during the quarter. Organizational alignments are largely complete and revenue synergies are on or ahead of projections. The implementation of measures related to cost savings remains on schedule. Restructuring expenses connected to the Program, since its launch in the fourth quarter 2004, reached a cumulative total of € 684 million by the end of the second quarter 2005. Restructuring expenses during the first half of 2005 are below original forecasts, partly reflecting lower-than-expected severance costs due to voluntary leavers in the affected areas. The original forecasts for cost savings and costs to achieve remain in place.
Business Segment Review
Corporate and Investment Bank Group Division
The Corporate and Investment Bank Group Division (CIB) reported underlying pre-tax profit of € 855 million in the current quarter, an increase of € 93 million, or 12%, from the same period last year. Income before income taxes, which additionally reflected restructuring charges of € 47 million in the second quarter 2005 and net gains of € 6 million from the sale of businesses/subsidiaries in the second quarter 2004, increased from € 769 million to € 808 million.
Revenues of € 3.6 billion in the second quarter 2005 grew 8% from the same period in 2004 despite substantially more challenging market conditions. The bank's performance in Sales and Trading (Debt and other products) was sustained at the strong level of last year's second quarter. For both the second quarter and the first half 2005, Deutsche Bank ranked #1 globally in Sales and Trading by revenues. Origination and Advisory revenues increased, reflecting greater activity in equity underwriting and M&A, with the bank further improving its competitive position as measured by its share of the global fee pool, and in European and U.S. league tables.
Revenues of € 1.6 billion in Sales and Trading (Debt and other products) in the second quarter 2005 were in line with the strong level of the second quarter 2004. Deutsche Bank maintained its global No. 1 position in revenues from such products. The bank's Credit Derivatives and Collateralized Debt Obligations (CDO) businesses proved resilient in the face of exceptionally challenging market conditions that ensued following the major rating agencies' decisions to remove investment-grade debt ratings from two of the world's largest auto company borrowers. Earnings in Commodities and Emerging Markets were up sharply compared to the second quarter 2004 while revenues in the interest rate trading businesses were down marginally. The bank's leading position in "market access" products was recognized by Euromoney magazine which voted Deutsche Bank the World's Best Foreign Exchange House for the second year running. Deutsche Bank's commitment to high-value structured products was also re-affirmed, with Euromoney naming Deutsche Bank as the World's Best Investment-Grade Bond House and the Best Bank at Risk Management in both North America and Latin America.
Sales and Trading (Equity) generated revenues of € 602 million in the second quarter 2005. Overall performance in proprietary trading improved compared to the second quarter 2004 although convertibles continued to underperform owing to extremely challenging market conditions. In the second quarter 2005 the bank continued to reduce its risk in equities proprietary trading, and to spin off further trading strategies into third-party funds. Global Prime Services had a strong quarter relative to the prior year period, mainly due to healthy client activity in Structured Equity Finance. Earnings in cash equities declined from those in the second quarter 2004 due to low market volumes and a highly competitive environment in program trading. In addition the quarter was favourably impacted by a € 65 million release in respect of a previously established operational risk reserve which is no longer required.
Origination and Advisory reported revenues of € 548 million in the second quarter of 2005, an increase of € 78 million, or 17% from the same period last year as the bank was able to increase its share of the global investment banking fee pool, notably in the U.S. In the first half of 2005, the bank further improved its competitive position and now ranks fourth globally by share of fee pool, as measured by Dealogic. The debt markets retreated slightly in the second quarter, with global high-yield corporate debt issuance being significantly weaker than a year ago. Origination (Debt) revenues, however, advanced slightly reflecting the bank's continued strong position in both investment-grade and high-yield debt. In addition, Deutsche Bank was named by Euromoney magazine as Best Debt House in Western Europe. Origination (Equity) revenues increased compared to the same period last year reflecting higher levels of activity in the European issuance markets. Advisory revenues also increased from last year, with M&A volumes continuing to rise, especially in the U.S. and Asia Pacific. In addition, the bank strengthened its pipeline by winning advisory roles in landmark transactions in the second quarter 2005, including the GBP 9.4 billion proposed acquisition of Allied Domecq by Pernod-Ricard, and, also with a financing role, the € 17.2 billion Wind Telecomunicazioni SpA transaction, the second largest leveraged buyout ever and the largest in Europe.
Loan Products' revenues of € 312 million for the second quarter 2005 increased 20% compared to the same period last year. Mark-to-market valuation changes on the bank's credit risk hedge positions more than offset a reduction in net interest income as a result of a reduction in the loan book driven by disciplined credit allocation and lower levels of demand.
Revenues from Transaction Services were € 478 million in the second quarter 2005, an increase of € 20 million compared to the same period in 2004. The increase was mainly driven by Trust & Securities Services as a result of a strong performance by the Structured Finance Services business and improvements in Cash Management Corporates business.
CIB's provision for credit losses for the second quarter of 2005 was € 3 million, similar to the second quarter 2004. This low level of provision reflects the quality of the bank's corporate loan book and further releases from workouts.
For the second quarter of 2005 CIB's operating cost base was € 2.7 billion, a 7 % increase from the comparable period last year, largely reflecting the impact of performance-related compensation in line with the improved results. Noninterest expenses (excluding provision for off-balance sheet positions), which included a restructuring charge of € 47 million related to the Business Realignment Program, were € 2.7 billion in the second quarter 2005 and € 2.5 billion in the second quarter 2004.
Private Clients and Asset Management Group Division
Underlying pre-tax profit in Private Clients and Asset Management (PCAM) was € 370 million in the second quarter 2005 compared to € 380 million in the same period last year. Income before income taxes, which includes restructuring charges of € 69 million in the second quarter 2005, was € 301 million compared to € 355 million in the second quarter 2004, which included a loss of € 25 million representing Private & Business Clients' (PBC) share in the sale of a subsidiary.
PCAM's invested assets increased by € 36 billion to € 908 billion in the second quarter 2005, with favourable currency movements contributing € 23 billion, and market appreciation accounting for € 21 billion, partly offset by € 10 billion net outflows. Private Wealth Management (PWM) captured net new assets of € 2 billion, bringing net new money in the first half to € 4 billion. This development reflects the continued success of PWM's integrated service offering. Asset Management (AM) saw net outflows of € 12 billion, mainly in the U.K., the Americas and Asia, partly offset by net new money inflows of € 2 billion in Continental Europe. Net outflows in Asia resulted in part from mandates from Asian clients managed out of the U.K. In response to strong trends in the Asian market, AM continues to re-focus its product strategy toward higher-value, alternative products in the region.
Asset and Wealth Management (AWM) recorded underlying pre-tax profit of € 124 million in the second quarter 2005, a decrease of € 12 million, or 9%, from last year's second quarter. Income before income taxes, which includes restructuring charges of € 54 million in the second quarter 2005, was € 70 million compared to € 136 million in the prior year period. This reflects the thorough reorganization underway in the Asset Management business.
Net revenues in AWM advanced slightly from the second quarter 2004. Private Wealth Management recorded strong year-on-year revenue growth, adjusting for a one-time gain in the prior year quarter. The major positive contributor was an increase of € 35 million in revenues from brokerage products. Most of the growth was attributable to strong customer demand for high value-added products. In AM, revenues from portfolio/fund management increased by € 30 million due to continued strength in Germany and Continental Europe and strong levels of performance fees, particularly in alternative investments. Partially offsetting these factors was a decline of € 49 million in revenues from other products, which largely reflects a gain in the prior year period from the sale of collateral obtained on a defaulted loan.
AWM's operating cost base was € 26 million higher than in the second quarter 2004, mainly reflecting higher expenses related to real estate transactions and legal provisions. Noninterest expenses increased by € 80 million in the quarter, including the aforementioned restructuring charges of € 54 million.
Shortly after the end of the second quarter 2005, Deutsche Bank announced an agreement to dispose of parts of its traditional AM business in the U.K., as well as the Philadelphia-based Active Fixed Income business. However, AM's U.K.-based Hedge Fund and Real Estate businesses and its Philadelphia-based High-Yield business remain a key part of the bank's strategy to grow its AM business in higher-value products, and are not included in the sale.
Private & Business Clients (PBC) recorded underlying pre-tax profit of € 246 million in the second quarter 2005, in line with the strong results of last year's second quarter. This strong profitability was maintained, despite simultaneous and continued investment in PBC's platform, thanks to solid revenue growth and volume growth in key products. Income before income taxes, which includes restructuring charges of € 15 million in the second quarter 2005 and a loss of € 25 million from the sale of a subsidiary in the second quarter 2004, increased to € 231 million from € 219 million last year.
Net revenues increased by € 65 million compared to last year's second quarter. Revenues from portfolio/fund management grew by € 7 million year-on-year, while revenues from brokerage products improved by € 26 million compared to the second quarter 2004, driven by ongoing successful product placements. Revenues from payments, account & remaining financial services, including insurance brokerage, were lower year-on-year, with sales of insurance products declining from the very strong levels in 2004 which were driven by changes in tax legislation in Germany. PBC also achieved volume growth in lending and deposit products. Revenues from other products were up € 61 million, due to higher revenues from PBC's re-financing and interest risk management activities as well as to the aforementioned loss from the sale of a subsidiary in last year's second quarter.
Provision for credit losses of € 73 million was € 7 million higher than in the second quarter 2004, partly due to increased loan volume as the bank pursues its strategy of growth in consumer lending.
The operating cost base increased € 32 million compared to the second quarter 2004 reflecting investments in the growth and expansion of the bank's platform both in and outside Germany, which entails higher information technology and marketing expenses. Noninterest expenses were € 47 million higher due to the aforementioned increase in the operating cost base plus € 15 million of restructuring expenses.
Corporate Investments Group Division
Corporate Investments (CI) reported an underlying pre-tax profit of € 144 million in the second quarter 2005, an increase of € 16 million compared to a gain of € 128 million in the second quarter 2004. Underlying revenues were € 200 million in the second quarter of 2005 compared to € 224 million in the second quarter of 2004. Both quarters included dividend income of approximately € 200 million from the bank's industrial holdings portfolio. CI's income before income taxes was € 202 million in the second quarter 2005 and € 179 million in the second quarter 2004. These results included several items that are excluded from underlying revenues. The 2005 amount included payments of € 39 million received from insurance companies to cover losses related to Deutsche Bank's 130 Liberty Street building and net gains from equity method and other investments of € 18 million while the 2004 amount included net gains of € 100 million from the sale of industrial holdings, net losses of € 57 million from equity method and other investments, and a gain of € 8 million on businesses sold.
CI's noninterest expenses were € 52 million in the second quarter 2005, a decrease of € 36 million compared to € 88 million in the second quarter 2004. This decrease was mainly related to the cost of eliminating excess space resulting from headcount reductions and the sale of businesses, which amounted to € 39 million in the second quarter of 2004.
The book value of CI's "alternative assets" decreased 35% to € 1.5 billion at 30 June 2005, from € 2.3 billion at the end of the second quarter of 2004, reflecting the bank's strategy of de-risking the bank.
Consolidation & Adjustments
Consolidation & Adjustments includes adjustments for differences between accounting methods used for management reporting and U.S. GAAP, as well as adjustments related to activities that are outside the responsibility of the business segments ("Corporate Items").
In Consolidation & Adjustments, income before income taxes was € 103 million compared to a loss before income taxes of € 142 million in the second quarter 2004. The current quarter included positive adjustments for differences in accounting methods for economically-hedged debt issuances and short-term funding positions, as well as for own shares. Such adjustments were negative in last year's second quarter. Additionally, results from corporate items positively impacted Consolidation & Adjustments in the current quarter.
Share Buyback Program
The Board of Managing Directors decided to launch with immediate effect a new share buyback program under the terms of the authorization granted at the Annual General Meeting on 18 May 2005. Within this new program, Deutsche Bank may buy back up to 10% of shares issued at the time of the Annual General Meeting, i.e., up to 54,832,129 shares, by 31 October 2006; reserving the right to suspend the program in favour of strategic growth initiatives.
As with previous programs, buybacks will be executed through direct purchases on XETRA and potentially through the use of derivatives. The bank plans to use repurchased shares to reduce share capital and to support future equity-based compensation programs. The bank also reserves the option to use the repurchased shares for other purposes in accordance with the authorization granted at the Annual General Meeting.
The bank will regularly publish information on the progress of the buyback program. Details can be viewed on the Investor Relations website at www.deutsche-bank.com/ir.
For further information, please contact:
Press and Media Relations
+49 69 910 43800 (Frankfurt)
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The complete Interim Report as of 30 June 2005 is available at www.deutsche-bank.com/2Q2005, the Financial Data Supplement for 2Q2005 at: http://www.deutsche-bank.de/ir/financial-supplements.
The Interim Report will be discussed in an analyst conference-call at 9 a.m. (CET). This conference call will be transmitted via internet: www.deutsche-bank.com/ir/video-audio.
This Release contains forward-looking statements. Forward-looking statements are statements that are not historical facts; they include statements about our beliefs and expectations. Any statement in this Release that states our intentions, beliefs, expectations or predictions (and the assumptions underlying them) is a forward-looking statement. These statements are based on plans, estimates and projections as they are currently available to the management of Deutsche Bank. Forward-looking statements therefore speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.
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 implementation of our Business Realignment Program; 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 24 March 2005 in the section "Risk Factors." Copies of this document are readily available upon request or can be downloaded from www.deutsche-bank.com/ir.
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