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With an unexpected profit, Deutsche Bank has a funny way of showing it’s in crisis

Jason Karaian
2016The headquarters of Germany's Deutsche Bank is photographed early evening in Frankfurt.

“In the past few months, a great deal has been said about us which deflects attention from our clients.” When you run a bank that’s described as “the next Lehman Brothers,” that’s an understatement.

Today (Oct. 27), John Cryan, the CEO of downtrodden Deutsche Bank, could cite 278 million reasons why worries about the bank may be overblown. That’s the size of the bank’s unexpected third-quarter profit, in euros ($304 million), a major reversal from the whopping €6 billion loss ($ 6.55 billion) it reported in the same period last year.



The bumper bond-trading results that Wall Street banks reported last week were also evident at Deutsche, which saw a 14% increase in revenue at its bond-trading business in the third quarter.

The focus, as always, is on the German bank’s looming litigation costs. Rumors last month that American authorities were considering a $14 billion fine for the bank’s role in peddling dodgy mortgage securities sent Deutsche’s share price spiraling to an all-time low. The bank took a €500 million legal charge in the latest quarter, and it now has around €6 billion in reserves set aside to cover the various cases it faces—it takes 10 full pages in its earnings report (pdf, start on p. 112) to detail all of the group’s ongoing legal entanglements.



Cryan says that negotiations in the US over the bank’s mortgage misdeeds will be resolved “as soon as possible.” The size of Deutsche’s provisions suggest that the final fine will be a fraction of the number that initially spooked the markets. Regardless, “legal cases like these are a burden for us,” Cryan said, stating the obvious.

“Unfortunately, we must anticipate that the situation will remain tough for some time to come,” he added, continuing the theme. To cut costs and bolster its balance sheet, the bank is shedding assets (it announced the sale of its Mexican subsidiaries today) and slashing headcount. Deutsche is not as big or diversified as its Wall Street rivals, so it relies more heavily on the flighty business of investment banking; although its latest results are encouraging, US banks reported stronger growth in almost every regard.

Still, today’s results will reduce the worries that the bank might need a government bailout, or even face a Lehman-like meltdown. That said, the market barely flinched. Deutsche’s shares are down by 40% so far this year, valuing the bank’s assets at a fraction of what the group says they’re worth in its accounts (a mere 30 cents on the euro).

After rattling off all the ways that the bank is in better shape than recent headlines suggest, Cryan warned: “I do not want to paint a flattering picture.” There is little risk of people getting that impression. .

 

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