Bad Loans Weigh on Deutsche Bank

Deutsche Bank AG on Monday warned of a difficult year ahead and said that loan loss provisions in 2002 could again rise from the previous year.

Last year, Deutsche, Germany's biggest bank, already more than doubled loan loss provisions to 1.02 billion euro as it faced a weakening economy and a growing number of company bankruptcies.

Germany's three other leading banks – HVB Group, Dresdner Bank and Commerzbank – also considerably boosted their loan loss provisions last year. According to Jochen Sanio, president of the BAWe banking industry watchdog, loan loss provisions usually reach their highest level around nine months after the economy hits rock bottom.

In its annual report presented in Frankfurt on Monday, Deutsche Bank forecast an economic recovery for the second half of 2002. This means that its provisions are likely to rise still further in the current year.

Analysts said an increase of as much as 20% could not be ruled out. An increase of this magnitude would put considerable pressure on Deutsche's profits. The bank's problem loans currently total 12.7 billion euro, or 4.9% of its total lending. In 2001, it had problem loans of 12.2 billion euro, or 2.6% of total lending.

"Many of our lendings will have to continue to be managed with great care and attention," Deutsche said in a statement.

One of the potential problem items in its portfolio is a loan to Cologne-based engine maker Deutz, which last year slid deep into the red despite having undergone restructuring.

In December, Wolfgang Clement, state premier of Deutz's home state, North Rhine-Westphalia, wrote to Deutsche Bank, warning of looming liquidity and capital shortages at Deutz and requesting that no decision on the group be taken without the involvement of the state government.

Deutz' banking debts total around 270 million euro, and Deutsche accounts for the lion's share. The bank also holds a 26% stake in Deutz, which on March 21 had a market value of just under 37 million euro.

Deutsche chief executive Rolf E. Breuer said that his group would continue to withdraw from non-core activities while expanding core areas that added value. "Divisions that are no longer of strategic importance, lack profitability, or have excessive capital needs are up for disposal," he said.

Deutsche believes the expected recovery in the second half of the year will have a positive impact on its corporate and investment banking (CIB) unit, on its private customers and asset management (PCAM) unit, and on its corporate investment (CI) unit.

Breuer said that PCAM's profits had been unsatisfactory last year. The unit, which is managed directly by Breuer, saw pretax earnings slump to 397 million euro from 1.4 billion euro. But the chief executive pledged to bring about improvements by making targeted acquisitions and forging strategic cooperations.

Deutsche's position in asset management was considerably strengthened through the takeover of Scudder and Rreef, but further acquisitions were feasible in the area of private banking, Breuer said.

At the CIB unit, which is managed by Breuer's designated successor, Josef Ackermann, pretax profit fell to 2.7 billion euro from 4.13 billion euros, contributing 81% of group pretax earnings, up from last year's 55%. Return on equity at PCAM came out at 18%, and at CIB at 19%.