FRANKFURT • Germany's Deutsche Bank posted an unexpected net profit of €278 million (S$422.2 million) in the third quarter after a record loss in the year-earlier period as it benefited from a surge in bond trading that boosted all Wall Street banks' earnings.
While benefiting from a subdued rebound in bond trading, Deutsche failed to dispel the cloud of uncertainty that has driven clients to withdraw billions of euros.
"The quarter was clearly overshadowed by the attention paid to our negotiations concerning the US Department of Justice's (DOJ's) initial settlement proposal relating to our RMBS (residential mortgage- backed securities) matters. This has created uncertainty," Deutsche chief executive John Cryan said during a conference call.
Deutsche has been in turmoil since the middle of last month when it said the US authorities were demanding up to US$14 billion (S$19.5 billion) to settle claims that it mis-sold US mortgage-backed securities before the financial crisis. In a letter to staff, Mr Cryan said: "Unfortunately, we have to assume that the situation will stay difficult for a while." He added that the bank was working hard to wrap up negotiations for the fine "as soon as possible".
"We will ... accelerate and intensify our restructuring," he wrote, referring also to a deteriorating environment more generally in certain important sectors.
Deutsche Bank shares rose 3.6 per cent in pre-market trading at brokerage Lang & Schwarz, while Germany's blue-chip index was seen down 0.4 per cent.
The quarter was clearly overshadowed by the attention paid to our negotiations concerning the US Department of Justice's initial settlement proposal relating to our RMBS (residential mortgage-backed securities) matters. This has created uncertainty.
DEUTSCHE BANK CHIEF EXECUTIVE JOHN CRYAN
Deutsche Bank hiked the amount of money it has set aside to cover the legal bill for its numerous missteps of the past. Litigation reserves rose to €5.9 billion from €5.5 billion at the end of June.
"Discussions with the DOJ to resolve its investigation of Deutsche Bank's pre-financial crisis RMBS business are ongoing," Deutsche Bank said in a presentation. It gave no information on when it expects to settle the case.
Revenues were up slightly at €7.5 billion in the quarter, ahead of analysts' expectations, mainly driven by Deutsche's trading activities, while business declined in all other operating businesses mainly due to the effects of the low interest-rate environment.
Deutsche Bank's cash-cow bond trading division, which has volatile revenues and tough capital requirements to meet, was up 14 per cent in the quarter, driven by Britain's surprise vote to leave the European Union and bouts of anxiety about monetary policy around the world. However, compared to its peers, Deutsche Bank's bond trading activities showed a subdued rebound, in part related to its decision to trim the unit.
In equities trading, the bank saw revenues decline in the quarter as low stock market volatility gave investors less reason to trade, while revenues from corporate and investment banking fell by 1 per cent due to weaker merger and acquisition fees, and capital market activity.