Crisis Catches Up To Deutsche Bank

FRANKFURT —Deutsche Bank won praise and envy in financial circles for appearing to weather the credit storm better than most of its peers, but its luck finally ran out on Tuesday.

The bank reported a pretax loss of 254 million euros ($396 million) for the first quarter, its first loss in five years, after writing down $4.2 billion in tainted loans and mortgage-backed securities.

Deutsche Bank had warned about the write-downs earlier this month, so they stirred less concern among analysts than the effect of the financial crisis on the bank’s day-to-day sales and trading business.

Revenues were down sharply in traditional Deutsche Bank franchises like credit- and equity-derivatives trading. The bank’s chief financial officer, Anthony Di Iorio, declined to reconfirm the bank’s earnings forecast for 2008, saying there was too much turbulence in the markets.

Deutsche Bank’s loss, analysts say, is less evidence of a bank that blundered into risky, poorly understood markets than a sign of how far this crisis has spread beyond its roots in the American mortgage market.

The loss would have been even worse if Deutsche Bank had not booked gains from selling shares in Daimler, Allianz and Linde — part of a long-term strategy to divest itself of stakes in German companies.

“Today’s numbers were disappointing,” said David Williams, head of banking research at the London office of the investment bank Fox-Pitt Kelton Cochran Caronia Waller. “Deutsche’s core business, their day-to-day, bread-and-butter operations have been affected.”

With the likelihood of further write-downs and the possibility that its trading business may not recover soon, some analysts have concluded that Deutsche Bank did not avoid the subprime crisis after all. It is merely suffering its effects six months later than Merrill Lynch, UBS and Citigroup.

“Deutsche Bank did much better than its peers because it was less exposed to the subprime areas,” said Simon Adamson, an analyst at CreditSights, a research firm in London. “But now the focus of the write-downs has shifted, and Deutsche has a large leveraged loan book.”

The bank said it had 33 billion euros ($51 billion) of exposure to leveraged finance, half of which were funded positions. Mr. Di Iorio said the bank had sold 1.4 billion euros of such loans in April.

Deutsche Bank, analysts said, might be forced to write down some of the remaining loans, though not as steeply as mortgage-backed securities, which basically stopped trading after the subprime crisis.

Shares of Deutsche Bank, which declined 29 percent in the last year, closed down less than 1 percent on Tuesday.

Analysts noted that Deutsche Bank’s loss was smaller than those of Credit Suisse or UBS. The bank has written down 5 billion euros ($7.7 billion) since the start of the crisis, far less than UBS or Citigroup.

Still, the crisis has rippled throughout Deutsche Bank’s corporate and investment bank, which had been its profit engine. The unit had revenue of 1.5 billion euros in the first quarter, compared with 6.7 billion euros in the period a year earlier. Revenues for sales and trading of debt and equities plunged. Foreign exchange trading, which grew, was one of the few bright spots.

“They are the world leader in structured credit products, and that’s a market that in the first quarter did absolutely no business,” Mr. Williams said. “What’s it going to do in the next quarters?”

Some bankers have spoken of an improving atmosphere in financial markets in recent weeks. But Deutsche Bank’s chief executive, Josef Ackermann, who has been outspoken about the magnitude of the crisis, offered little solace in a statement issued with the earnings.

“In the month of March, pressure on the banking sector was more intense than at any time since the current credit downturn began,” he said. “Inevitably, this left its mark on Deutsche Bank’s results.”

Mr. Ackermann reaffirmed Deutsche Bank’s strategy, which has sought a balance between volatile trading businesses and more stable operations, like asset and wealth management and retail banking.

It may soon have an opportunity to bolster its presence in these more stable areas. Citigroup, as part of a review of its operations, is weighing a plan to sell its German consumer bank, according to executives there. If it were to be put up for sale, Deutsche Bank has publicly expressed interest.

“Citibank has a fairly good quality operation in Germany,” said Mr. Adamson of CreditSights. “Deutsche might be able to get a favorable valuation, because Citigroup has problems of its own.”

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