Deutsche Bank AG braced for an economic slump by raising loan loss provisions in the second quarter, overshadowing a nearly 70 percent rise in net profit driven mainly by its investment bank.
Shares in Deutsche, Germany's biggest bank, fell 7.9 percent to 47.93 euros by 0912 GMT on Tuesday - the largest decliner on the German blue-chip DAX index as its cautious outlook showed that fallout from the global credit crisis in the real economy is a concern, even as investment banking profits recover.
Deutsche said its provisions for credit losses rose to 1 billion euros in the second quarter from 135 million euros a year earlier and were almost double the 526 million euros in provisions made in first quarter.
Equinet analyst Phillip Haessler said he was particularly worried about the bank's higher risk provisions.
While the second-quarter results were strong, we expect the positive capital market environment be sustainable, he said.
BBVA , Spain's second-largest bank, also said on Tuesday it raised its bad loan provisions, prompting a 10 percent decline in first-half net profit, but net interest income increased sharply.
Deutsche Bank Chief Executive Josef Ackermann said the Frankfurt-based bank was well prepared for an uncertain environment, adding that he remained cautious on the outlook for the global economy, particularly employment and real estate markets.
For the banking sector as a whole, pressure on loan portfolios is likely to continue increasing substantially as private and corporate insolvencies mount and default rates rise, Deutsche Bank said.
The lender's second-quarter net profit rose to 1.09 billion euros ($1.56 billion) from 649 million euros a year earlier, and above the 985 million euro average estimate in a Reuters analyst poll.
But earnings were flattered by a low tax rate made possible by a raft of one-off charges. On a pretax level, profit more than doubled to 1.32 billion euros, but fell short of the 1.47 billion euro average analyst estimate.
We call the second-quarter numbers a mixed bag. Deutsche Bank did not beat market expectations. Pretax earnings were slightly below and net income slightly above market expectations due to a low tax rate of 18 percent, said DZ Bank analyst Matthias Duerr.
The figures underline Deutsche's reliance on investment banking, which on its own accounted for more than 60 percent of total pretax profit in the second quarter.
Rival Credit Suisse last week posted better-than- expected profit on the back of market share gains in investment banking and hefty wealth management inflows.
A rise in revenue from trading debt-related products and a reduction of lossmaking toxic assets on its books helped Deutsche turn around profits at the investment banking arm from a 311 million euros loss in the second quarter 2008.
At the investment bank's core debt sales and trading arm, markdowns on toxic assets tied to subprime mortgages fell to 108 million euros during the second quarter, compared with the 2.1 billion euros in markdowns a year earlier.
(Additional reporting by Judith MacInnes; editing by Erica Billingham)