FRANKFURT: Deutsche Bank posted a surprise net profit in the first quarter that was helped by lower litigation costs, lifting its shares, and said it saw 2016 as the peak of a restructuring drive.
Germany's flagship lender said on Thursday its quarterly net income fell 58 percent to 236 million euros ($268 million) after a slump by its investment bank in volatile markets and its departure from certain businesses.
But that beat analysts' average expectation for a net loss of 249 million euros, and the bank's shares rose 2.6 percent in a market that was down by 1.2 percent.
"On an operating basis, the year is looking in line.
The first couple of months were very slow, especially compared with how they normally are," Chief Executive John Cryan said during an analyst call.
But he said an acceleration of legal settlements and restructuring could lead to higher costs in the remainder of the year at the bank, which announced an overhaul last October to restore profitability after its valuation sank following a series of scandals and fallout from a market rout in Asia.
"The issue is that we want to get an awful lot done this year," Cryan said.
Despite the rise in the bank's share price, it is still down 24 percent since the start of the year and has recovered little since a selloff of European bank shares in February on concerns about their ability to cope with a low-growth, low interest-rate environment.
Chief Financial Officer Marcus Schenck said he expected the bank's costs to remain flat this year.
"We are looking into potentially accelerating some of the cost measures that we have planned until 2018 as a reaction to what we are seeing in the market," he said.
Deutsche Bank is considering further reductions of its trader headcount, cancelling contracts with external advisors for regulatory issues speeding up the revamp of its information technology and Asian service centres.
While Deutsche Bank booked 1.4 billion euros less in legal costs in the quarter than in the year-earlier period, it expects to settle other big legal cases this year, such as ones involving allegations of fraud related to US-mortgages and alleged money laundering in Russia.
That will result in a sharp increase in the litigation bill in the coming quarters, although the total is expected to remain below last year's 5.2 billion euros.
Cryan, who this year urged investors to be patient with his revamp of the bank, said the restructuring efforts would peak in 2016 and mostly be completed in 2017.
"POSITIVE SURPRISE" ON COST SIDE
Union Investment, one of Deutsche Bank's top investors, said Deutsche Bank had surprised positively on investment banking income as well as costs for litigation, restructuring and the divestment of non-core assets.
"The development of the capital side is negative.
That remains a challenge, but there is no acute need for a capital increase," fund manager Helmut Hipper said. Deutsche Bank reiterated that it was confident of complying with bank regulators' demands regarding its capital cushion.
It is targeting a stable core tier 1 ratio of 11.1 percent at year-end, despite a 0.4 percentage point drop in the first quarter.
While the sale of its Chinese Hua Xia unit will boost the ratio by 0.5 percent, greater clarity on bank rules also means that Deutsche Bank has another year - until the end of 2019 - to show a required reading of 12.25 percent.
"We see downside risk on litigation - we model 3.6 billion euros in 2016 - which is likely to eventually necessitate a capital raise, in our view," analysts at Citi said in a note.
Deutsche Bank's revenues from trading debt and equities dropped 29 percent in the first quarter as sliding commodity prices, worries about the Chinese economy and the low interest rate environment kept clients from trading, investing or issuing new securities.
European peers like Barclays and US rivals such as Goldman Sachs have suffered similar trends in their investment banking activities.
Deutsche Bank also saw effects of its retreat from individual business lines such as secondary trading of mortgage-backed securities.
It has also largely pulled out of Latin America and countries such as Russia and South Korea, except for some client-related forex trading activities.
Despite having fired so-called front office staff as traders, the headcount at the investment bank -- now called Global Markets -- increased by 4 percent, while lower bonuses brought total compensation down by 22 percent in the quarter.
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