Germany’s biggest bank predicts challenging year ahead

Deutsche Bank, Germany’s biggest bank, said this year will be challenging after a surge in legal costs and lower debt-trading revenue spurred a surprise fourth- quarter loss.

Depressed interest rates in Europe and declining demand for banking services are also among the headwinds the bank is confronting in 2014, co-chief executive Anshu Jain said on a conference call with analysts from Frankfurt.

Deutsche Bank, like competitors including UBS, has faced probes into matters such as alleged manipulation of interest rates and currencies.

At the same time, Jain said the firm is losing revenue in debt trading, a mainstay of income for investment banks, as it sheds assets to meet strict capital rules.

The fourth-quarter pre-tax loss of €1.15bn included €528m in litigation-related expenses as well as costs tied to the bank’s reorganisation.

It was down from €3.17bn in the same period of 2012. Profit in the third quarter of last year was almost wiped out after the bank added €1.2bn to its reserves for legal expenses.

The investment banking and trading unit saw its revenue slide 27% to €2.46bn in the fourth quarter from the same period of 2012. The decline was led by a 31% drop in debt-trading income.

“The worry is fixed income revenues that were down,” said Christopher Wheeler, an analyst with Mediobanca SpA.

“Comparing that to their US counterparts who reported last week, that is much, much weaker.”

Deutsche Bank generated 15% of its revenue from trading debt and other products in the fourth quarter of last year compared with 27% in 2012.

Deutsche Bank said its transaction banking and money management units were profitable in the final three months of last year.

Jain and co-chief Jürgen Fitschen are “confident” the bank can reach profitability and capital targets they set for 2015.

Deutsche Bank had €2.3bn set aside for legal costs at the end of December, down from €4.1bn three months earlier, after it settled three cases with regulators and clients.

Deutsche Bank expects “some volatility and potential downward pressure” on its capital ratio in the coming quarters as European regulation is harmonised, chief financial officer Stefan Krause said.