Deutsche Bank put on a magic show for third-quarter earnings report today pulling a winning rabbit out of a losing hat. Germany’s biggest bank, aided by an acounting rules change was able to post paper profits, but no rule change could save the cliff dive that those profits took. Deutsche Bank today reported net income of EUR 414 million, versus EUR 1.6 billion in the third quarter 2007. Earnings per share on a diluted basis were EUR 0.83 for the third quarter 2008, versus EUR 3.31 per share in the prior year quarter. Income before income taxes was EUR 93 million, versus EUR 1.4 billion in the prior year quarter. Mark-downs of EUR 1.2 billion were recorded on leveraged loans and loan commitments, residential mortgage-backed securities, monoline insurers, commercial real estate and on available for sale positions. The Tier 1 capital ratio, reported under Basel II, was 10.3%, versus 9.3% at the end of the second quarter 2008.
Provisions for credit losses For the quarter
Provision for credit losses for the quarter was EUR 236 million, versus EUR 105 million in the third quarter 2007. Provisions in CIB were EUR 66 million, versus a credit of EUR 19 million in the prior year quarter, reflecting EUR 72 million of provisions in respect of loans reclassified in accordance with the aforementioned accounting amendments. Provisions in PCAM were EUR 169 million, versus EUR 124 million in the prior year quarter, primarily reflecting deteriorating credit conditions in Spain and the expansion of PBC’s consumer finance business in Poland in line with strategy.
Provisions for credit losses for the first nine months of fiscal 2008
For the first nine months of 2008, provision for credit losses was EUR 485 million, compared to EUR 283 million in the first nine months of 2007.
Have you ever had a bunch of garbage that you just wished you could get rid of, but could not no matter how hard you tried? Well working stiffs like you and me really have no right to ask for such a thing, our parents told us so. But for Germany’s biggest and most deserving investment bankall things are possible.
In October 2008 the European Union endorsed amendments to IAS 39 and IFRS 7, ‘Reclassification of Financial Assets’, which permit the reclassification of trading assets and assets available for sale in cases involving a clear change of management intent. In accordance with these amendments, Deutsche Bank reclassified certain assets, for which no active market existed in the third quarter and which management intends to hold for the foreseeable future, out of trading assets and assets available for sale, and into loans. If these reclassifications had not been made, the income statement for the quarter would have included negative fair value movements relating to the reclassified assets of EUR 845 million. Additionally, incremental net interest margin relating to reclassified assets was EUR 53 million for the quarter.
Folks let’s not get carried away here, and of Bull Sh!t that at one time or have caused riots, but now it is merely commonplace. It’s still worthwhile to look at what the bank paid the regulators to change. Woops! Oh my did I say that, I meant to say paid off!
…,for which no active market existed in the third quarter and which management intends to hold for the foreseeable future,
What that really means no active market existed in the third quarter, or ever will exist, we can’t get rid of them so we’ll just hold onto them, but we will call them loans. And that’s really sweet because as of the end of the second quarter that level 3 Tide had risen to 6% of total assets, but now magically in a poof of accounting smoke and mirrors they are gone! but wait, there’s more - and I am not making this up- the bank any bank can hold a loan as an asset on its balance sheet, so now the stinky crap comes out smelling like a rose, told you it was sweet.
If these reclassifications had not been made, the income statement for the quarter would have included negative fair value movements relating to the reclassified assets of EUR 845 million. Additionally, incremental net interest margin relating to reclassified assets was EUR 53 million for the quarter.
This little disclaimer doesn’t help much installing the problem of valuing Deutsche Bank’s pain index. Say you have a mortgage-backed bond which should pay $1 million over the remaining life of the bond, but the mortgagor’s have not made a payment since dinosaurs roamed the earth. now on my planet that would have been called a $1 million liability, but fantasyland called it a level 3 asset, and now I’ve had enough of this crap calls it a $1 million asset. Ouch! what we want to do here is reverse that $1 million asset to a level 3 liability. Maybe this will help.
Taking advantage of new accounting rules has shifted Deutsche Bank into a profit instead of a loss.
The bank reclassified 25bn Euros (£19.7bn) of assets as loans it will hold until maturity. The shift allowed it to avoid 845m Euros of writedowns on some of its assets.
Avoiding the writedown helped raise net income by 536m Euros and led to it posting a quarterly net income of 414m euros.
The new accounting provisions allowed the bank to have a ‘more proper treatment’ of its assets, said its CFO Stefan Krause, reported the FT.
It had previously classified some assets as ‘trading’, which meant they were valued at market price through the profit and loss account. The assets are now described as ‘available for sale’, which is still at market value but the price movements are held on the balance sheet.
The provision is an easing of the controversial fair value mark-to-market accounting.
If those reclassifications had not been made the bank would have posted a loss and almost assuredly would be begging for money, but the reclassification kept Deutsche Bank off the governments welfare lines for now.
Deutsche Bank, Germany’s largest bank, will not tap a rescue fund launched by the German government to help banks hit by the global financial crisis, its chief executive said on Sunday.
“From today’s perspective, we will not take part (in the rescue fund) because we are strong,” Josef Ackermann said in comments from an interview with German public TV channel ZDF to be broadcast late on Sunday.
With the third quarter in the books, what’s next? moving deeper into the credit crisis you can expect more losses more write-downs and more magic shows with smaller and smaller rabbits popping out of smaller and smaller hats.
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