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Deutsche Bank takes $3.5-billion loss to pay for cleanup

A Deutsche Bank logo is pictured in front of the Deutsche Bank headquarters in Frankfurt February 24, 2011.

© Ralph Orlowski / Reuters

Deutsche Bank plunged to a €2.6-billion ($3.5-billion U.S.) quarterly loss after it took charges aimed at drawing a line under a series of scandals and cleaning up its balance sheet without asking shareholders for cash.

Germany's biggest lender said on Thursday the pretax loss was partly due to a €1-billion hit to cover legal risks, including its potential exposure to an industry-wide scandal involving the fixing of benchmark interest rates.

It also announced a €1.9-billion impairment charge on underperforming assets, shifting them to a "non-core" division for potential run down or sale as part of a move to strengthen its capital position and avoid a rights issue.

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"We have been very consistent. We have said we do not believe it is in our shareholders' best interests. We have shown that we are willing to take pain," Co-Chief Executive Anshu Jain told a conference call when asked about a possible rights issue.

"This said, clearly, it is a very uncertain world. There is a plan B. We will not rule out any option that is in the best interest of Deutsche Bank."

Banks across the world are slashing costs and selling or writing off weaker assets in a bid to meet tougher capital rules aimed at preventing a repeat of the 2008 financial crisis.

Deutsche Bank has cut its risk-weighted asset (RWA) base, helping to raise its core tier one capital ratio under Basel III rules to 8 per cent at the end of 2012 from under 6 per cent at the end of 2011. RWAs are a bank's assets, usually loans, adjusted for the likelihood of non-payment.

However, Deutsche Bank's ratio is still among the lowest for a major European bank and some analysts said its capital cushion could drop if global regulators harmonise the way banks estimate the riskiness of their loan books.

"They might apply some minimum floor for RWAs, which would cost Deutsche Bank a lot ... Their internal models could have to be thrown out the window," said Espirito Santo analyst Andrew Lim, who has a "sell" recommendation on Deutsche Bank shares.

Mr. Lim believes the bank needs between €15-billion and €20-billion of additional capital.

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"I think they need that amount ... they might not be made to raise it, they haven't been made to raise it by (German regulator) BaFin. The ECB might take a much more stern stance and force them to raise equity or reduce their balance sheet," he added, referring to the European Central Bank which is taking on supervision of banks across the region.

Deutsche Bank said it was too early to say if allegations its staff were involved in rigging the London Inter Bank Offered Rate (Libor) would be settled this year.

Switzerland's UBS and Britain's Barclays paid a total of nearly $2-billion to settle such allegations.

Deutsche Bank Chief Financial Officer Stefan Krause played down the legal problems, saying peers had similar issues. "The tail of legal liabilities is fairly typical," he told analysts. "The regulatory and litigation environment remains challenging."

The bank said its new "non-core" division would house €125-billion worth of assets that either eat up too much capital or fail to throw off sufficient profits.

The bulk of the impairment charge on these assets – €1.2-billion – was attributable to the bank's corporate banking and securities unit (CB&S), its main investment banking arm and traditionally its strongest performer.

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CB&S posted a quarterly pretax loss of €548-million.

Analysts had expected Deutsche Bank to report a fourth-quarter pretax profit of €116-million, the average of seven estimates in a Reuters poll of banks and brokerages showed. It was not immediately clear whether the analyst estimates had factored in goodwill impairments.

The bank's net loss for the quarter was €2.2-billion.

Since the end of 2011, the bank has reduced headcount by 2,777, the results showed. it is in the midst of a restructuring drive designed to achieve annual cost savings of €4.5-billion by 2015.

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