Deutsche Bank reports record first quarter 2006 pre-tax profit of € 2.6 billion, up 46%
- Net income up 55% to EUR 1.7 billion
- Total revenues up 21% to EUR 8.0 billion
- Pre-tax return on equity of 40%
- Diluted earnings per share up 58% to EUR 3.30
- Record quarterly earnings in both Private Clients and Asset Management (PCAM) and the Corporate and Investment Bank (CIB)
- Net new money in PCAM of EUR 12 billion
Dr. Josef Ackermann, Chairman of the Management Board, said: "This was the most profitable first quarter in Deutsche Bank's history, with record performances in both PCAM and CIB. Market conditions were favourable: the world's capital markets performed strongly; levels of corporate activity, above all in Europe, remained high, with positive momentum in Germany; and demand for investment management solutions, from individuals and institutions, was robust."
He added: "We reaped full benefits from our strategic positioning, our integrated business model and our focused investments in growth businesses and markets."
Dr. Clemens Börsig, Chief Financial and Risk Officer, has been appointed as a member of the Deutsche Bank Supervisory Board by the Frankfurt Local Court and has been elected as Chairman of the Supervisory Board, effective 4 May 2006.
Net revenues for the quarter were EUR 8.0 billion, up 21% versus the first quarter 2005. In CIB, revenues in sales and trading rose 37% to EUR 4.4 billion, with best-ever quarterly revenues both in Sales & Trading (Debt and other Products) and Sales & Trading (Equity). Revenues in Sales & Trading (Debt and other Products) rose 19% to EUR 2.8 billion, while Sales & Trading (Equity) rose 90% to EUR 1.6 billion, reflecting growth in all major regions and most core businesses. Revenues in Origination rose 18% to EUR 468 million, while revenues in Advisory rose 58% to EUR 180 million, reflecting high levels of corporate activity in Europe, notably in Germany. Revenues in PCAM rose 14% to EUR 2.3 billion, driven by strong business flows from both investment management and consumer lending products in Private & Business Clients (PBC), together with continued momentum in Asset and Wealth Management (AWM). Revenues in this division grew 18% compared to the first quarter 2005, with the current quarter including higher gains on asset sales in Real Estate Asset Management.
Provision for credit losses, which includes provisions for both loan losses and off-balance sheet positions (the latter reported in noninterest expenses), was EUR 4 million for the first quarter 2006, compared to EUR 81 million in the first quarter 2005. This reduction primarily reflected recoveries and releases owing to a series of successful workouts in CIB, while the level of new provisions was low due to the high quality of the loan book and a benign credit environment. Problem loans at the end of the first quarter were EUR 3.6 billion, down from EUR 3.9 billion at the end of the previous quarter, while the ratio of problem loans to total loans fell to 2.2%, the lowest level for more than five years. The ratio of loan loss allowances to problem loans rose to 51%.
Noninterest expenses for the quarter were EUR 5.4 billion, up 14% versus the first quarter 2005. The reported cost-income ratio improved by four percentage points to 67%, versus 71% in the first quarter 2005. Restructuring expenses were EUR 42 million during the quarter, compared to EUR 168 million in the first quarter 2005. The operating cost base, which excludes restructuring expenses and other items, was EUR 5.3 billion, up 17% versus the first quarter 2005. The underlying cost-income ratio improved by two percentage points to 68%, versus 70% in the first quarter 2005, reflecting sustained cost discipline in a period of strong business performance. Compensation costs rose 21% to EUR 3.6 billion, reflecting higher performance-related compensation. The ratio of compensation costs to revenues remained stable compared to the previous year. Non-compensation costs rose 10% to EUR 1.7 billion, reflecting higher business volumes and continued investments in growth initiatives.
Income before income taxes for the quarter was EUR 2.6 billion, up 46% versus the first quarter 2005. Reported pre-tax return on average active equity was 40%, up ten percentage points from 30% in the first quarter 2005. Per the bank's target definition (which excludes restructuring expenses of EUR 42 million in the current quarter and of EUR 168 million in the first quarter last year), pre-tax return on average active equity was also 40%, up seven percentage points from 33% in the first quarter 2005.
Net income for the quarter was EUR 1.7 billion, up 55% versus the first quarter 2005. Net income in the current quarter includes EUR 46 million of cumulative effects of accounting changes, net of tax, resulting primarily from the adoption of SFAS 123 (R), which requires the adjustment of accrued costs of equity compensation to reflect expected forfeitures. Diluted earnings per share were EUR 3.30, up 58% versus EUR 2.09 in the first quarter 2005. The effective tax rate was 36% compared to 38% in the first quarter 2005.
The BIS Tier 1 capital ratio rose to 8.8% at the end of the quarter, from 8.7% at the end of the previous quarter. This ratio thus remains at the upper end of the bank's target range of 8-9%. During the quarter the bank repurchased 12.1 million shares, or 2.3% of the total shares issued, for a consideration of EUR 1.1 billion, as part of the fourth share buyback program. By the end of the first quarter, repurchases under this program reached a cumulative total of 28.3 million shares at an average price of EUR 84.84 per share. This represents 5.5% of total shares issued, and 52% of the total repurchase capacity of this program. At the 2006 Annual General Meeting on June 1st, management will seek shareholder approval for a new buyback authorization of up to 10% of shares issued.
Group Headcount (on a full time equivalent basis) saw a net rise of 676 during the quarter, reflecting investments in business expansion, notably in Europe and key emerging markets. As part of the bank's investment in PBC's distribution platform, 215 additional full time equivalent posts were created in Germany.
Business Segment Review
Corporate and Investment Bank Group Division (CIB)
In CIB, underlying pre-tax profit was EUR 2.1 billion for the first quarter 2006, an increase of EUR 528 million, or 33%, from EUR 1.6 billion in the first quarter 2005. Income before income taxes, which also includes restructuring expenses of EUR 22 million in the first quarter 2006 and EUR 122 million in the first quarter of the previous year, improved by EUR 628 million, or 43%, to EUR 2.1 billion. This record performance was driven by higher revenues, which grew by EUR 1.1 billion, or 25%, to EUR 5.7 billion.
Corporate Banking & Securities (CB&S)
Deutsche Bank's Sales & Trading businesses posted record revenues in both Debt and other Products and in Equity. The Origination and Advisory businesses also registered substantial year-on-year growth. Most businesses continued to demonstrate strong earnings momentum, thanks to growing customer demand for capital markets products and a favourable trading environment, together with ongoing benefits from the Business Realignment Program, as illustrated by the integration of the Debt and Equity sales and trading platforms.
Sales & Trading (Debt and other products) generated revenues of EUR 2.8 billion in the first quarter 2006, an increase of 19% over its previous record performance in the first quarter 2005. Revenue growth was significant in the credit businesses, driven by increasing customer activity in credit derivatives and securitized products and by profitable capital structure arbitrage opportunities. Deutsche Bank's foreign exchange business, which Euromoney ranked #1 in the world for the second consecutive year with a market share of over 19%, increased revenues substantially against a background of higher volatility in G10 currencies. Emerging markets debt trading showed good revenue growth primarily due to a stronger performance in Latin America. Net revenues in interest rate products were lower due to reduced customer activity in duration management and structured investment products. In addition, earnings in the commodities business did not benefit significantly from the volatility in energy prices during the quarter, reflecting the bank's relatively low exposure to this sector.
Sales & Trading (Equity) generated record quarterly revenues of EUR 1.6 billion, an increase of 90% over the first quarter 2005. All business lines experienced significant earnings growth with net revenues substantially higher in equity derivatives, emerging markets and prime services. These business lines benefited from increasing activity across all major customer types and geographies and tighter alignment with the fixed income franchise. In addition, trading volumes in cash equities grew significantly across all regions while favourable market conditions during the quarter also contributed to a strong performance in proprietary trading.
Origination and Advisory generated revenues of EUR 648 million in the first quarter 2006, an increase of EUR 138 million, or 27%, from the same period last year. Origination (Debt) revenues were driven by acquisition financing and market share gains in syndicated loans (source: Dealogic) in a rising interest rate environment. Origination (Equity) revenues increased as a result of a strong IPO market. Deutsche Bank performed strongly in European IPOs and gained market share in the Americas, Europe and Japan, while Advisory revenues surged by more than 50% reflecting a strong increase in M&A activity and market share gains in the Americas, Europe and Asia-Pacific excluding Japan (source: Dealogic). In Europe, Deutsche Bank advised on six of the top ten largest deals announced in the first quarter of 2006 (source: Thomson Financial).
Loan Products revenues were EUR 169 million for the first quarter 2006, a 56% decrease on the same period last year. The decrease was primarily due to mark-to-market losses on credit default swaps used to hedge investment-grade loan exposure. While credit spreads widened in the comparative period of 2005, the first quarter of 2006 saw overall spread tightening with particular impact on selected industry sectors of the hedge portfolio of the Loan Exposure Management Group.
CB&S recorded a net release of EUR 56 million in provision for credit losses in the first quarter 2006, compared to a net charge of EUR 8 million for the comparative quarter last year. Approximately half of the improvement was attributable to a recovery relating to one borrower, with the remainder reflecting other successful workouts giving rise to recoveries as well as provision releases. The level of new provisions remained low, supported by the continued benign credit environment and tight credit discipline.
The operating cost base in CB&S was EUR 3.2 billion in the first quarter 2006, a 26% increase over the same period last year, driven by higher performance-related compensation in line with the development of operational performance. The underlying cost-income ratio improved to 63%, versus 64% in the first quarter 2005. Noninterest expenses in the first quarter included EUR 14 million restructuring charges representing CB&S' share of the Business Realignment Program.
Underlying pre-tax profit in CB&S was EUR 1.9 billion in the quarter, up 34% versus the first quarter 2005.
Global Transaction Banking (GTB)
Transaction Services revenues were EUR 535 million in the first quarter 2006, an increase of EUR 48 million, or 10%, versus the same period in 2005. Trust and Securities Services revenues grew significantly as a result of strong new business and transaction volumes in Structured Finance Services and Domestic Custody. Cash Management earnings were also higher from both the Corporate and the Financial Institution businesses.
GTB recorded a net release of EUR 16 million in provision for credit losses in the first quarter 2006, compared to a net release of EUR 4 million for the comparative quarter last year, reflecting the benign credit conditions.
GTB's operating cost base in the first quarter 2006 was EUR 364 million, a 6% increase from the comparative period last year, mainly reflecting higher transaction-related expenses as well as increased performance-related compensation in line with the improved operational performance. Noninterest expenses included restructuring charges of EUR 7 million in the current quarter and of EUR 15 million in the first quarter 2005, representing GTB's share of the Business Realignment Program.
Underlying pre-tax profit was EUR 187 million in the quarter, up 25% versus the first quarter 2005.
Private Clients and Asset Management Group Division (PCAM)
In PCAM, underlying pre-tax profit in the first quarter was a record EUR 558 million, up 37% versus the first quarter 2005. Income before income taxes, after taking into account restructuring charges of EUR 20 million, was EUR 538 million in the first quarter 2006, up 49% or EUR 176 million versus the first quarter 2005 (which reflected restructuring expenses of EUR 45 million). Underlying revenues were EUR 2.3 billion, up EUR 280 million or 14% versus the first quarter 2005 while the operating cost base of EUR 1.7 billion increased EUR 119 million or 8%.
During the first quarter 2006, PCAM's invested assets grew by EUR 18 billion to EUR 885 billion compared to EUR 867 billion at year end 2005. The growth was largely attributable to net new assets of EUR 12 billion, including net inflows of EUR 8 billion in the European retail asset management business and of EUR 4 billion in Private Wealth Management (PWM). The remaining net increase in invested assets was attributable to market appreciation, in part offset by foreign exchange rate movements.
Asset and Wealth Management Corporate Division (AWM)
In AWM, underlying revenues in the first quarter were EUR 1.0 billion, up EUR 157 million or 18% versus the first quarter 2005. Portfolio/fund management revenues (AM) increased 14%, primarily reflecting higher management fees, particularly in the retail business in Germany corresponding to the aforementioned growth in invested assets, as well as higher levels of performance fees in the Real Estate businesses. These increases were partly offset by a decline of revenues subsequent to the sale of a substantial part of the UK- and Philadelphia-based AM businesses in the second half of 2005. Portfolio/fund management revenues (PWM) increased 17% primarily reflecting strong performance increases in client portfolios and continued net inflows of invested assets. Brokerage revenues were up 15% versus the first quarter 2005, mainly due to higher transaction-based flow revenues from increased client activity in strong financial markets. Loan/deposit revenues increased 23%, driven by higher margin loan and time deposit volumes. Revenues from Other Products grew 50%, to EUR 119 million, primarily due to higher gains from investment sales in the Real Estate business, predominately in the Asia-Pacific region.
The operating cost base was EUR 794 million in the current quarter, up 10% or EUR 75 million versus the first quarter 2005, mainly driven by higher performance-related compensation and marketing expenses related to the re-branding campaign in the U.S. of Scudder as DWS Scudder. Partly offsetting these increases was the favourable impact of the aforementioned sale of businesses.
AWM's underlying pre-tax profit was EUR 238 million, its second best ever quarterly result and an increase of EUR 75 million, or 46%, versus the first quarter 2005.
Private & Business Clients Corporate Division (PBC)
PBC achieved record results in the first quarter of 2006 both in terms of revenues and profitability. Underlying revenues of EUR 1.3 billion grew by EUR 123 million or 11% versus the first quarter 2005, driven by higher returns from investment management products and consumer lending. Portfolio/fund management and brokerage revenues grew significantly by 47% and 20% respectively, supported by favourable conditions in Germany and in other European countries with increased customer activity and strong business volumes. PBC's diversified range of investment products, including offerings using Deutsche Bank's Global Markets and Asset Management expertise, combined with well-established distribution channels enabled PBC to take full advantage of this positive market environment. Loan/deposit revenues grew by 7% versus the first quarter 2005. Loan revenues showed robust growth reflecting PBC's strategy of expanding consumer lending. Deposit revenues also increased, due to higher volumes and margins.
Provision for credit losses of EUR 80 million was essentially unchanged compared to the first quarter 2005. The impact of higher loan volumes was offset as both the rate and the aging of delinquent loans improved in the current quarter.
The operating cost base of EUR 875 million in the first quarter 2006 was up 5% versus the first quarter of the previous year. The cost increase remained moderate despite continuing growth initiatives, with staff increases mainly in Germany, India and Poland.
PBC's underlying pre-tax profit increased to a new quarterly record of EUR 321 million, up 31% compared to the first quarter 2005.
Corporate Investments Group Division (CI)
CI reported an underlying pre-tax profit of EUR 2 million in the first quarter 2006, an improvement of EUR 47 million from an underlying loss of EUR 44 million in the first quarter 2005. CI's income before income taxes was EUR 135 million in the first quarter 2006. Included were net gains and significant equity pick-ups from investments of EUR 126 million, of which a gain of EUR 85 million resulted from the sale of Deutsche Bank's remaining stake in EUROHYPO AG. In the first quarter 2005 income before taxes of EUR 69 million included a net gain of EUR 80 million on the sale of the stake
in Südzucker AG.
The book value of CI's alternative assets was further reduced to EUR 1.1 billion at 31 March 2006, compared to EUR 1.4 billion at 31 December 2005.
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The complete Interim Report as of 31 March 2006 is available at http://www.deutsche-bank.com/1Q2006, the Financial Data Supplement for 1Q2006 at: http://www.deutsche-bank.de/ir/en/content/reports_archive.htm .
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