Deutsche Bank’s explicit admission in its third-quarter results that higher regulatory costs are hitting the profitability of its global transaction banking business will come as blow to the bank and a warning to others.
Pre-tax profits in Deutsche’s GTB business slid 11% to €338 million in the third quarter compared with a year ago, primarily because of “higher regulatory spend” and “increased revenue-related expenses and investments”, the bank said in reporting quarterly results this week.
It is unsurprising that higher regulatory cost is adversely affecting the profitability of a banking business, but Deutsche’s admission does appear to be the first clear indication among global transaction banks that this cost is materially hitting the bottom line despite rising revenues in the business.
Net revenues in the third quarter were up marginally by 2% (€15 million) on the same quarter last year.
However, Deutsche's GTB division has reported falling pre-tax profits for the second successive quarter. A “litigation-related charge” in the second quarter cut pre-tax profits by 29% to €228 million.
GTB forms a core part of the bank’s growth strategy and senior management have set a target of €2.4 billion in pre-tax profits in the full year 2015 – three times what it made in the full year of 2012.
A spokesperson for Deutsche Bank in London declined to comment specifically on the “regulatory spend” that affected GTB’s profits.
In the results statement, Jürgen Fitschen and Anshu Jain, co-chief executives, said of the bank’s overall performance: “Net income in this quarter was materially impacted by provisions as we continued to work toward resolution of litigation matters related to legacy issues. We also incurred costs of adapting to new regulation, elevating our systems and control frameworks…and investing in growth in our core businesses.”
Deutsche reported a group quarterly net loss of €92 million compared with a profit of €51 million a year earlier as it set aside €894 million to cover legal costs. Net revenues, however, rose 2% to €7.9 billion year on year, largely because of higher revenues in corporate banking and securities. Net revenues in CB&S were up 9% (€247 million) at €3.1 billion.