Germany’s biggest bank has deferred significant legal costs into 2015, unexpectedly boosting fourth quarter 2014 results.
While deferring these costs – which from cases of alleged interest rate and currency benchmark manipulation along with a possible violation of US sanctions against Iran – has helped Deutsche Bank post an unexpected pre-tax profit of €253m in the fourth quarter of 2014, the move is expected to drag future results down.
Analysts had expected the bank to swallow €1bn in litigation costs and post pre-tax losses of €83m last quarter. Instead Deutsche Bank booked a comparatively mild €207m in legal costs.
Stefan Krause, chief financial officer of Deutsche Bank, said: “We don’t expect any of these litigation [costs] to be lower, so it’s just a deferral into 2015 which will obviously make the number much higher in 2015.”
Though the delay will complicate internal efforts to recover from the financial crisis and improve shareholder returns, the markets greeted Deutsche Bank’s surprise profit warmly. Shares were up 2.6% over mid-day trading.
Full-year pre-tax profit more than doubled in 2014 to €3.1bn, but Atlantic Equities analyst Chris Wheeler told Reuters that strong revenue performance at Deutsche’s investment bank camouflaged a struggle to boost returns.
The group achieved a return on equity of just 2.6% in the fourth quarter of 2014, compared with their internal target of around 12%. In an effort to boost these numbers Deutsche Bank will review its universal banking model to determine whether segregating business segments could boost long-term profitability.
Wheeler explained: “Revenues are one thing but profitability is another. That is a very different story. They are not going to get anywhere close to their targets in 2015 and seem to have recognised that by promising a strategic recalibration in the Spring.”
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