Deutsche Bank (XETRA: DBKGn. DE/NYSE: DB) reported income before income taxes of EUR 1.9 billion for the second quarter 2006, up 32% versus the second quarter 2005. Net income was EUR 1.2 billion, up 29%. Reported pre-tax return on average active equity was 29%, compared to 23% in the prior year quarter. Pre-tax return on average active equity per the bank’s target definition, which excludes restructuring charges and substantial gains on the sale of industrial holdings, was 29%, compared to 25% for the prior year quarter. Diluted earnings per share were up 14% to EUR 2.17.
For the first six months, income before income taxes was EUR 4.5 billion, up 40% versus the first six months of 2005. Net income was EUR 2.9 billion, up 43%, while pre-tax return on average active equity, per target definition, was 35%, compared to 29% for the first six months of 2005. Diluted earnings per share were EUR 5.57, up 37%.
Dr. Josef Ackermann, Chairman of the Management Board, said: “We proved our ability to deliver in challenging conditions in the second quarter. Despite volatile markets in May and June, Deutsche Bank turned in a quarter which was significantly ahead of the same period in 2005, and as a result, an outstanding first half year.”
He added: “We have built leading franchises in those areas where we compete. We remain committed to growth by organic investment and by focused incremental acquisitions. In both developed and emerging markets across the world, we are well-placed in areas of long-term strategic potential.”
Net revenues for the quarter were EUR 6.8 billion, up 15% versus the second quarter 2005. Revenues in the Corporate and Investment Bank (CIB) rose 27% to EUR 4.5 billion. Revenues in Sales and Trading (Debt and other products) were the best ever for a second quarter, rising 46% to EUR 2.4 billion, against a backdrop of better markets in credit trading and strong customer activity in the foreign exchange, money markets and rates businesses. Revenues in Sales and Trading (Equity) rose 23% to EUR 743 million, with growth in derivatives, cash and prime services. In challenging equity markets, CIB’s equity proprietary trading unit gave up some of the gains recorded in the first quarter, resulting in a second-quarter trading loss, but nevertheless remained solidly positive for the first six months of 2006. Revenues in Origination and Advisory rose 33% to EUR 732 million, driven primarily by record revenues in Origination, with high-yield debt issuance recovering strongly from the challenging conditions of the second quarter 2005.
Revenues in Private Clients and Asset Management (PCAM) rose 15% to EUR 2.3 billion, mainly reflecting substantial performance fees in the real estate Asset Management business, while revenues in both Private Wealth Management and Private and Business Clients also grew year-on-year.
For the first six months, Group net revenues were EUR 14.8 billion, up 18% versus the first six months of 2005.
Provision for credit losses, which includes provisions for both loan losses and off-balance sheet positions (the latter reported in noninterest expense), was EUR 78 million for the quarter, slightly down from the second quarter 2005. Provision for credit losses in PCAM grew in line with business growth in consumer lending, while provision for credit losses in CIB continued to benefit from successful workouts. Problem loans at the end of the quarter were EUR 3.5 billion, down from EUR 3.6 billion at the end of the first quarter 2006, the lowest level for more than five years.
Noninterest expenses for the quarter were EUR 4.8 billion, compared to EUR 4.4 billion in the second quarter 2005. The reported cost/income ratio was 71%, down from 75% in the second quarter 2005, while restructuring charges were EUR 57 million, down from EUR 116 million. The operating cost base, which excludes restructuring charges and other items, was EUR 4.8 billion in the second quarter, up 12% versus the second quarter 2005. Compensation costs rose by 17% to EUR 3.1 billion, reflecting higher performance-related compensation, and resulting in an underlying compensation ratio of 46%, up from 45% in the second quarter of 2005 but stable compared to the first quarter 2006. Non-compensation operating costs were EUR 1.7 billion, up by 4% versus the second quarter 2005, reflecting business investments including marketing and promotional expenses. For the first six months, noninterest expenses were EUR 10.2 billion, up 12% versus 2005, while the operating cost base was EUR 10.1 billion, up 15%, with both increases reflecting higher bonus accruals consistent with improved operating performance. The underlying cost/income ratio for the first six months improved to 69%, down from 72% in the first six month of 2005.
Income before income taxes for the quarter was EUR 1.9 billion, up 32% versus the second quarter 2005. Reported pre-tax return on average active equity was 29%, up from 23% in the prior year period. Per the bank’s target definition (which excludes restructuring charges of EUR 57 million in the current quarter and EUR 116 million in the second quarter 2005), pre-tax return on average active equity was 29%, compared to 25% in the prior year period. For the first six months, pre-tax return on average active equity, per target definition, was 35% versus 29% in 2005.
Net income for the quarter was EUR 1.2 billion, up 29% from EUR 947 million in the second quarter 2005. The effective tax rate was 34%, compared to 33% for the second quarter 2005. Diluted earnings per share for the quarter were EUR 2.17, up 14% versus the second quarter 2005. For the first six months, net income was EUR 2.9 billion, up 43% versus 2005, while diluted earnings per share were EUR 5.57, up 37%.
The BIS Tier 1 ratio was 8.7%, compared to 8.8% at the end of the first quarter, and comfortably within the bank’s target range of between 8 and 9%. Deutsche Bank reaffirmed its capital management strategy of maintaining core capital strength, funding business growth, and generating attractive returns for shareholders. The bank grew its risk position by EUR 6 billion to EUR 263 billion during the quarter, while also repurchasing 12.3 million shares, at an average price of EUR 91.03 per share. At the Annual General Meeting on 1 June, shareholders approved a new buyback program, authorizing the repurchase of up to a further 10% of outstanding shares, which was started on 2 June 2006, replacing the previous program.
Business Segment Review
Corporate and Investment Bank Group Division (CIB)
In CIB, underlying pre-tax profit was EUR 1.4 billion for the second quarter 2006, an increase of EUR 558 million, or 65%, from EUR 857 million in the second quarter 2005. Income before income taxes, which also includes restructuring charges of EUR 25 million in the second quarter 2006 and EUR 47 million in the second quarter of 2005, rose by EUR 580 million, or 72%, to EUR 1.4 billion.
Corporate Banking & Securities (CB&S)
Revenues in Sales and Trading (Debt and other products) were EUR 2.4 billion in the second quarter 2006, up by 46%, or EUR 747 million, versus the second quarter 2005. Year-on-year growth was particularly high in the bank’s credit trading businesses, with markets having recovered substantially from the challenging second quarter of 2005. Performance was also strong in foreign exchange, money markets and rates, while revenues were weaker in Emerging Markets Debt. Euromoney magazine acknowledged its leading position in structured products by naming Deutsche Bank the World’s Best Risk Management House. With respect to its “market access” products, Euromoney named the bank the World’s Best Investment-Grade Debt House for the fourth consecutive year, and Best Emerging Markets Debt House for the first time. Deutsche Bank was also named Best Debt House in Asia.
Sales and Trading (Equity) generated revenues of EUR 743 million in the second quarter 2006, up by 23% versus the second quarter 2005. Earnings were strong across all customer businesses. Cash Equities, Equity Derivatives and Prime Services saw substantial year-on-year revenue growth due to more active customer flow. Successive corrections across major and developing indices during May and June made conditions more challenging in the equity proprietary trading unit, resulting in a trading loss in the second quarter after a very strong first quarter performance. Nonetheless, almost all proprietary trading strategies remained significantly positive in the first half of the year. Euromoney magazine named Deutsche Bank Best Equity House in Germany and Russia, the latter acknowledging the advance made in its Russian franchise since the integration of United Financial Group.
Origination and Advisory generated revenues of EUR 732 million in the second quarter 2006, up by EUR 184 million, or 33%, versus the same period last year. Origination (Debt) revenues benefited from rising market volumes across all products, especially compared with weaker high-yield markets of the second quarter 2005. Deutsche Bank maintained a top 3 position globally in high-yield bonds and top 5 positions in syndicated loans and high grade bonds. Origination (Equity) revenues reflected higher market volumes across all products and regions although some slowing was experienced late in the quarter due to volatility in global equity markets. Deutsche Bank’s share in international convertibles, European equity and equity-related issues, and US equity issues continued to increase in the first half of the year. Advisory revenues in the first half of the year reflected higher market volumes globally and market share gains in Europe and Japan as measured by fee pool. In European M&A, Deutsche Bank gained five places and achieved a top five position by fee pool (sources for all rankings, market volume and fee pool data: Thomson Financial, Dealogic).
Loan Products revenues were EUR 232 million for the second quarter 2006, a 25% decrease from the same period last year. The second quarter 2006 saw spread tightening in certain industry sectors resulting in mark-to-market losses in the hedge portfolio, whereas spreads had generally widened in the corresponding quarter of 2005, resulting in mark-to-market gains in that period.
In provision for credit losses, CB&S recorded a net release of EUR 11 million in the second quarter 2006, compared to a net release of EUR 6 million for the same quarter last year. Releases and recoveries from various successful workouts more than offset the low level of new provisions.
The operating cost base in CB&S was EUR 2.8 billion in the second quarter 2006, an 18% increase over the same period last year, largely driven by higher performance-related compensation in line with improved operating results. The underlying cost-income ratio improved to 69%, versus 76% in the second quarter 2005. Noninterest expenses in the second quarter 2006 included restructuring charges of EUR 17 million representing CB&S’s share of the Business Realignment Program. Similar charges in the second quarter 2005 were EUR 39 million.
Underlying pre-tax profit in CB&S was EUR 1.2 billion in the quarter, up 63% versus the second quarter 2005.
Global Transaction Banking (GTB)
Revenues from Transaction Services were EUR 564 million in the second quarter 2006, an increase of EUR 85 million, or 18%, versus the same period last year. The custody business generated significantly higher fee income, due in large part to a 46% increase in assets compared to the second quarter 2005. Structured finance-related services also contributed to revenue growth in an attractive market environment for asset-backed and mortgage-backed securities. Revenues in GTB’s cash management businesses also grew, reflecting higher volumes and increased margins.
GTB recorded a net release of EUR 6 million in provision for credit losses in the second quarter 2006, compared to a net charge of EUR 9 million for the same period last year.
GTB’s operating cost base was EUR 365 million in the second quarter 2006, a 2% increase from the same period last year with the underlying cost-income ratio improving to 65%, compared to 74% in the second quarter 2005. Noninterest expenses included restructuring charges of EUR 8 million in the second quarter 2006 and EUR 9 million in the same quarter 2005, representing GTB’s share of the Business Realignment Program.
GTB’s underlying pre-tax profit was EUR 204 million in the quarter, up 81% versus the second quarter 2005.
Private Clients and Asset Management Group Division (PCAM)
In PCAM, underlying pre-tax profit in the second quarter was EUR 490 million, up EUR 119 million, or 32%, compared to the second quarter 2005. Income before income taxes of EUR 493 million increased EUR 191 million or 63%. The current quarter included restructuring charges of EUR 32 million and a gain of EUR 35 million from the completion of the sale of a substantial part of the UK- and Philadelphia-based Asset Management (AM) business. The second quarter 2005 included restructuring charges of EUR 69 million. In the second quarter 2006, PCAM’s underlying revenues grew by EUR 261 million, or 13%, to EUR 2.3 billion while the operating cost base increased by EUR 128 million, or 8%, to EUR 1.7 billion.
During the second quarter 2006, invested assets decreased by EUR 33 billion to EUR 852 billion from EUR 885 billion at the end of the first quarter. The decrease was mainly a result of market depreciation, against a backdrop of more challenging conditions with declining market indices at the end of the second quarter, together with foreign exchange rate movements. Net asset outflows in AM, mainly in the Institutional business, were largely offset by net new assets in Private Wealth Management (PWM).
Asset and Wealth Management (AWM)
In AWM, underlying revenues in the second quarter were EUR 1.0 billion, up EUR 178 million, or 21%, compared to the second quarter 2005. Portfolio/fund management revenues in AM grew EUR 160 million, or 31%. The increase mainly reflected higher performance fees in the Real Estate business, especially in North America for a single long-term mandate managed by the real estate asset management business. In addition, the DWS Europe business continued to contribute strongly. These increases were partly offset by a decline due to the absence of revenues in 2006 resulting from the aforementioned sale of business units in the second half of 2005. In PWM, Portfolio/fund management revenues and Brokerage revenues increased by 9% and 2%, respectively. The improvement reflected the growth in invested assets since last year's second quarter, which continued with net new asset inflows of € 3 billion in the current quarter. Higher revenues from this increased asset base more than offset the negative impact of deteriorating market conditions by the end of the second quarter. Loan/deposit revenues increased by 17%, driven by higher margin loan and time deposit volumes. Revenues from Other products grew by EUR 36 million primarily due to the aforementioned gain on businesses sold.
AWM’s operating cost base of EUR 830 million in the second quarter 2006 increased EUR 95 million or 13%. The main driver was higher performance-driven compensation expenses, especially in AM’s Real Estate business. In addition, the operating cost base reflected higher expenses for the rebranding and repositioning of the U.S. retail AM business and continued investments in the growth of the PWM franchise. Partly offsetting these increases was a favorable impact due to the sale of businesses in the second half of 2005.
AWM’s underlying pre-tax profit in the second quarter 2006 was EUR 209 million, an increase of 67%, or EUR 84 million, compared to the second quarter last year.
Private & Business Clients (PBC)
PBC had another strong quarter with underlying revenues of EUR 1.2 billion, up EUR 83 million, or 7%, compared to the second quarter 2005 reflecting sustained growth across all business lines. Portfolio/fund management revenues and Brokerage revenues grew 35% and 5%, respectively. The increases in volumes achieved since last year’s second quarter and the continued successful launch of innovative investment products mitigated the effect of more challenging market conditions at the end of the second quarter this year. Loan/deposit revenues grew by 9% versus the second quarter 2005 reflecting higher volumes in the consumer lending business and the benefit on deposits of both rising interest rates and higher client volumes. Revenues in Payments, account & remaining financial services grew by 14%, mainly due to higher brokerage revenues from insurance products in Germany reflecting the bank’s strong market position in retirement products sold to individuals.
Provision for credit losses of EUR 88 million for the second quarter 2006 increased EUR 15 million versus the second quarter 2005 due to the growth in consumer lending as well as write-offs on certain mortgage loans.
The operating cost base of EUR 860 million was up 4% compared to the second quarter 2005. This moderate increase reflected continued cost discipline despite ongoing investments, notably in India, and the expansion of PBC’s branch network in Poland.
PBC’s underlying pre-tax profit of EUR 281 million was its second best quarter ever and 14% higher than last year’s second quarter.
Corporate Investments Group Division (CI)
CI reported an underlying pre-tax profit of EUR 56 million in the second quarter 2006, a decrease of EUR 88 million compared to EUR 144 million in the second quarter 2005. This decline was a direct result of Deutsche Bank’s strategy of reducing exposure to non-core assets. Main items were a reduction in dividend income of EUR 91 million, principally due to the partial sale of Deutsche Bank’s holding in DaimlerChrysler AG, and the non-recurrence of returns from the bank’s investment in EUROHYPO AG following the disposal of that holding. Partly offsetting these decreases were lower funding costs subsequent to these sales.
CI’s income before income taxes was EUR 109 million in the second quarter 2006 and included EUR 54 million of net gains and significant equity pick-ups from investments. In the second quarter 2005, income before income taxes of EUR 202 million included payments of EUR 39 million received from insurance companies to cover losses related to the 130 Liberty Street building and net gains of EUR 18 million from equity method and other investments.
The book value of CI’s alternative assets was further reduced to EUR 0.9 billion at 30 June 2006 compared to EUR 1.1 billion at 31 March 2006.
Consolidation & Adjustments
Consolidation & Adjustments includes a range of Corporate Items, such as unallocated interest, certain provisions for legal and other exposures as well as other items which are not owned by the business segments. In addition, any accounting asymmetry created by the application of SFAS 133 to the very broad range of debt and structured note issuances, which are generally managed to be economically risk-neutral, are also reported here. Effects from this accounting asymmetry formed the most significant element of the revenue decline between the second quarter 2005 and the current quarter. Also contributing to the decrease were exceptionally high unallocated net interest revenues in the second quarter last year.
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The complete Interim Report as of 1 August 2006 is available at http://www.deutsche-bank.com/2Q2006, the Financial Data Supplement for 2Q2006 at: http://www.deutsche-bank.de/ir/en/content/reports_archive.htm .
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.
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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 management agenda; 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 23 March 2006 on pages 7 through 13 under the heading "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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