Josef Ackermann, Chairman of the Group Executive Committee, said: "In the third quarter 2005, we produced our best third-quarter result ever. In our core markets we saw increased customer activity against a backdrop of rising confidence in the world's financial markets. This boosted our business volumes and favourably impacted our results."
He added: "After an outstanding first nine months, we now look forward with confidence to a successful conclusion to 2005, and to continued success in 2006. Our strategy is clear, our growth momentum is strong and our management of costs, risks and capital remains tight. We are confident that, if business and market conditions remain stable, we will deliver on our published financial target, and turn our strong performance into clear benefits for our shareholders."
Net revenues for the third quarter were € 6.6 billion, up 31% versus the third quarter 2004. The gain on the sale of shares in DaimlerChrysler AG accounted for seven percentage points of this increase. Total Sales and Trading revenues were € 2.9 billion, up 56%, the best result ever for a third quarter. Revenues from Sales and Trading (Equity) were up 155% to € 1.0 billion, while revenues from Sales and Trading (Debt and other products) rose 29% to € 1.9 billion. Origination and Advisory revenues rose 25% to € 571 million, the best result in eleven quarters. Within Private Clients and Asset Management (PCAM), revenues rose 11% versus the third quarter 2004 to € 2.2 billion, driven in part by revenue growth of 19% in Asset and Wealth Management. For the first nine months of 2005, Group net revenues rose 15% versus the prior year period to € 19.1 billion.
Provision for credit losses, which includes provisions for both loan losses and off-balance sheet exposures (the latter reported in noninterest expenses), was € 91 million in the third quarter, compared to € 80 million in the second quarter and € 58 million in the third quarter 2004. For the first nine months of 2005, provision for credit losses was € 252 million, down 11% versus the prior year period. Problem loans at the end of the third quarter were € 4.3 billion, down from € 4.6 billion at the end of the second quarter 2005. The ratio of problem loans to loans was 2.9% at the end of the third quarter, the lowest for five years, and down from 3.2% at the end of the second quarter. The coverage ratio was 49% at the end of both the third and second quarters of 2005. These favourable developments reflect tight credit risk management, the quality of the loan book and positive results of workout processes.
Noninterest expenses for the quarter were € 4.7 billion, an increase of 17% over the third quarter 2004. In the current quarter, noninterest expenses included restructuring expenses of € 156 million. For the first nine months of 2005, noninterest expenses, including restructuring expenses of € 440 million, were € 13.8 billion, compared to € 12.5 billion in the same period of 2004. The operating cost base, which excludes restructuring expenses and other items, was € 4.5 billion for the third quarter 2005, up 13% versus the third quarter 2004. Within the operating cost base, compensation and benefits costs rose 18%, driven by a rise in performance-related compensation, reflecting strong business results. Non-compensation costs rose 6%, driven by additions to provisions for legal exposures related to historical events. Without these litigation expenses, non-compensation expenses would have been essentially unchanged from the third quarter 2004, despite higher business volumes. For the first nine months, the operating cost base was € 13.3 billion, up 6% versus the same period last year. Compensation and benefits costs rose 10% from the prior year period, while non-compensation costs were essentially unchanged. The development of the operating cost base reflects sustained cost discipline and benefits of the Business Realignment Program.
Income before income taxes for the quarter was € 1.9 billion, up 87% from the third quarter 2004. This included restructuring expenses of € 156 million and a gain of € 337 million on the sale of shares in DaimlerChrysler AG. Pre-tax return on average active equity was 29% for the quarter. The gain on the sale of shares in DaimlerChrysler AG, partially offset by restructuring expenses, had a net positive impact on this ratio of three percentage points. For the first nine months of 2005, income before income taxes was € 5.1 billion, after restructuring expenses of € 440 million, a rise of 36% from the prior year period. For the first nine months, reported pre-tax return on average active equity was 28%. Before restructuring expenses and the gain on the sale of DaimlerChrysler AG shares, pre-tax return on average active equity for the first nine months was also 28%. This compares to the bank's published target of 25% for the full year 2005.
Net income for the third quarter 2005 was € 1.0 billion, up 46% versus the third quarter of 2004. The after-tax contribution of the sale of shares in DaimlerChrysler AG was € 37 million, which was more than offset by the negative post-tax impact of restructuring expenses of € 97 million. For the first nine months of 2005, net income was € 3.0 billion, up 34% versus the same period in 2004.
The effective tax rate for the quarter was 47%, including the effect of tax reversal on the gain on the sale of shares in DaimlerChrysler AG. Excluding the tax reversal effect, the effective tax rate was 31%. For the first nine months, the effective tax rate was 40%, or 34% excluding tax reversal effects.
Diluted earnings per share for the quarter were € 1.89, up 48% versus € 1.28 in the third quarter 2004. For the first nine months of 2005, diluted earnings per share were € 5.95, up 44% versus € 4.13 in the same period last year.
The Tier I capital ratio at the end of the quarter was 9.0%, compared to 9.1% at the end of the second quarter, and thus remained at the top of the bank's 8-9% target range. In the third quarter, the bank repurchased 2.5 million shares for a total consideration of € 184 million. Under the authorization of the last Annual General Meeting, the bank has the capacity to repurchase up to a total of 54.8 million shares.
The Business Realignment Program continued to progress during the quarter. All organizational alignments have been substantially completed, and personnel measures are proceeding on schedule. The original forecasts for headcount savings, cost savings and costs to achieve remain in place.
Business Segment Review
Corporate and Investment Bank Group Division (CIB)
CIB reported underlying pre-tax profit of € 1.3 billion in the third quarter 2005, a significant increase of 136% from the same period last year. Income before income taxes, which additionally reflects restructuring charges of € 54 million in the third quarter 2005, increased from € 557 million to € 1.3 billion.
Revenues of € 4.1 billion in the third quarter 2005 increased 41% from the same period in 2004. The bank's Sales and Trading businesses benefited from strong customer demand for capital markets products, which remained high throughout the traditionally slower months of July and August. The bank continued to extend its franchise in structured products. Risk magazine ranked Deutsche Bank as the world's leading derivatives liquidity provider in its annual survey of inter-dealer brokers. The bank's Origination and Advisory businesses also performed strongly, reflecting greater activity and increased market share in equity underwriting and M&A.
Sales and Trading (Debt and other products) generated revenues of € 1.9 billion in the third quarter 2005, an increase of 29% over the third quarter 2004 and a record third quarter performance. Structured products grew strongly, driven above all by a very strong performance in Credit Derivatives, reflecting a significant recovery in customer activity after the difficult conditions in credit markets during the second quarter. Foreign Exchange registered substantial year-on-year growth, reflecting healthy market volumes in foreign exchange markets, a stable interest rate environment and continued product innovation. Emerging Markets Debt also sustained strong growth, driven by success in both Emerging Europe and Latin America. Distressed Products' revenues were considerably higher, reflecting good progress in providing high-value, customized workout solutions for clients.
Sales and Trading (Equity) generated revenues of € 1.0 billion, an increase of 155% versus the third quarter 2004. All business lines saw significant revenue growth. Global Equity Derivatives grew very strongly, reflecting high levels of client demand and the bank's strong position in a fast-developing product. Cash equities also grew strongly on the back of high market volumes, positive outlooks in major stock indices and strong primary equity activity, notably in Europe. Prime Services took full advantage of positive market conditions for stock lending and financing customer balances. Proprietary trading recovered strongly from the levels of the third quarter 2004 against the background of favourable equity markets where we continue to focus on selective trading opportunities. Despite strong growth in total equity sales and trading revenues, overall equity risk positions saw comparably modest increases.
Origination and Advisory generated revenues of € 571 million in the third quarter, an increase of 25% over the third quarter 2004. Revenues in Origination rose 23% to € 424 million, reflecting strong primary equity markets, particularly in Europe, and a strong recovery in global high-yield markets compared to the second quarter. Advisory revenues rose 28%, as rising levels of corporate activity drove M&A volumes. In this positive environment, the bank was able to make substantial gains in its share of the fee pool for these products, as measured by analysis of Dealogic data. In Europe, the bank doubled its share of the fee pool compared to the third quarter 2004, and was ranked No.1 by deal volume in European investment banking in the first nine months of 2005, having advisory roles in a large number of the leading M&A transactions.
Loan Products generated revenues of € 240 million for the third quarter, an increase of 7% over the third quarter 2004. The increase was driven by mark-to-market valuation changes on the bank's credit risk hedge positions. Credit spreads have tightened since the second quarter 2005 but still remain wider than those experienced at the end of the third quarter 2004. The development of Loan Product revenues reflects ongoing selective credit allocation in the bank's corporate business as well as a low level of demand.
Transaction Services generated revenues of € 494 million in the third quarter, an increase of 7% over the third quarter 2004. The bank took advantage of strong volumes in securities markets during the quarter. Revenues in core businesses performed strongly, particularly Trust and Securities Services, including Asset-Backed Securities and Mortgage-Backed Securities, and in Trade Finance. The bank also maintained its leading position as a provider of Global Cash Management services to financial institutions.
Provision for credit losses was € 5 million in the quarter, and thus remained at the very low levels achieved in the first and second quarters of 2005. The sustained low level of provision for credit losses reflected the quality of the bank's corporate loan book and further releases from workouts.
For the third quarter of 2005 CIB's operating cost base was € 2.7 billion, an 18% increase from the comparable period last year, largely reflecting the impact of performance-related compensation in line with the improved results. Noninterest expenses were € 2.8 billion in the third quarter 2005 (including a restructuring charge of € 54 million related to the Business Realignment Program) and € 2.3 billion in the third quarter 2004.
Private Clients and Asset Management Group Division (PCAM)
PCAM generated underlying revenues of € 2.1 billion in the quarter, up 10% compared to the third quarter 2004. Provision for credit losses was € 91 million, an increase of € 36 million, while the operating cost base for the quarter increased 2% to € 1.6 billion. As a result, underlying pre-tax profit increased 34% to € 461 million compared to € 344 million in the third quarter 2004. Income before income taxes was € 410 million and included, in addition to underlying pre-tax profit, restructuring charges of € 100 million and net gains of € 49 million from the sale of businesses. This compares to income before income taxes of € 362 million in the third quarter 2004, which included a gain of € 19 million from the sale of businesses.
PCAM's invested assets attributable to continued businesses increased by € 21 billion to € 856 billion at the end of the quarter, mainly due to market appreciation. This increase was offset by a € 56 billion decline in invested assets of businesses sold/held for sale, which were thereby reduced to € 18 billion at the end of the quarter. This decline was due mainly to the partial sale of the U.K.-based Asset Management (AM) businesses on September 30, 2005. The remaining invested assets related to this transaction are scheduled to be transferred to the buyer in the fourth quarter 2005. Overall, PCAM's invested assets decreased by € 35 billion to € 874 billion at the end of the quarter.
Asset and Wealth Management Corporate Division (AWM)
In July 2005 AM announced the sale of a substantial part of its U.K.- and Philadelphia-based business to Aberdeen Asset Management PLC. The first tranche of the transaction closed on September 30, 2005 and included the U.K.-based institutional Equity, Fixed Income, Global Equity and Multi-Asset businesses and the retail DWS business. The remaining tranche, covering the business with U.S.-domiciled clients managed out of the U.K. and Philadelphia, is expected to close in the fourth quarter 2005.
Underlying revenues were € 962 million in the quarter, an increase of 16% over the third quarter 2004. Revenues from Portfolio/fund management (AM) increased by € 48 million reflecting higher performance fees and continued net asset inflows in Continental Europe and in the Real Estate business. Brokerage revenues in Private Wealth Management (PWM) increased by € 34 million compared to the third quarter 2004 driven by higher client activity and continued strong demand for high value-added products. PWM's revenues from Loan/deposit products increased by € 10 million due to higher volumes.
Reported revenues from Other Products in AWM were € 119 million in the third quarter and included a gain of € 54 million from the sale of the first tranche of the U.K.-based AM businesses. This gain, net of € 12 million in operating costs related to this transaction, was excluded from underlying revenues and underlying pre-tax profit. Also included in Other Products revenues was € 21 million from a release of reserves from prior years deemed no longer necessary.
AWM's operating cost base was € 742 million in the quarter, an increase of 3% over the third quarter 2004. The increase was mainly due to the disposal-related costs of € 12 million mentioned above and higher incentive-based compensation expenses due to performance improvements.
Underlying pre-tax profit was € 207 million in the quarter, an increase of 106% from the third quarter 2004. This significant performance improvement reflected three factors: progress on the reorganization of the bank's AM business, continued build-up of the PWM platform, and increased client activity in a more favourable capital market environment.
Private and Business Clients (PBC)
Underlying revenues were € 1.2 billion in the quarter, an increase of 5% compared to the third quarter 2004. A € 57 million increase in revenues from Brokerage products reflected ongoing successful placements of investment products as well as increased transaction-based flow revenues. Revenues from Loan/deposit products were essentially unchanged compared to the third quarter 2004, as loan volume increases were offset by lower deposit margins in a challenging competitive environment, especially in Germany. Within Payments, account & remaining financial services, revenues from insurance brokerage almost reached the high level of the third quarter 2004.
Revenues from Other Products in PBC were € 80 million in the quarter, and included a gain of € 8 million related to the sale of the private banking business in the Netherlands. This gain was excluded from underlying revenues.
Provision for credit losses was € 91 million in the quarter, € 34 million higher than in the third quarter 2004, partly due to profitable growth in the loan book, especially in the consumer portfolio.
The operating cost base was € 835 million, an increase of only € 9 million, or 1%, compared to the third quarter 2004, despite investments in growth initiatives. As a result, when combined with the increased underlying revenues, PBC achieved its best ever underlying quarterly cost/income ratio.
PBC's underlying pre-tax profit was € 254 million in the quarter, an increase of 4% over the third quarter 2004 and in line with the strong performance of previous quarters. Increased revenues offset higher provision for credit losses and charges for targeted growth initiatives in European and key emerging markets. During the quarter, PBC continued the expansion of its branch network in Poland and, in October, announced an investment in, and a cooperation agreement with, Hua Xia Bank in China, as well as an expansion into branch banking in India. In Germany, PBC announced an exclusive sales agreement with ADAC (Germany's and Europe's largest automobile club with more than 15 million members), launched a loan program specifically tailored for students, and further expanded its mobile sales force network.
Corporate Investments Group Division (CI)
CI reported an underlying pre-tax loss of € 33 million in the third quarter 2005, an improvement of € 28 million over the third quarter 2004. CI's income before income taxes, which reflects several items that are excluded from underlying results, was € 375 million in the third quarter 2005 compared to € 40 million in the same period last year. The increase was mainly attributable to a gain of € 337 million resulting from the sale of part of the bank's stake in DaimlerChrysler AG.
Consolidation & Adjustments
Consolidation & Adjustments recorded a loss before income taxes of € 163 million in the third quarter 2005 compared to an income before income taxes of € 46 million in the third quarter last year. The result for the current quarter was negatively impacted by additions to provisions for legal exposures of € 108 million related to historical events. In the third quarter of 2004, Consolidation & Adjustments included interest income of € 110 million on tax refunds resulting from prior period tax returns.
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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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