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Deutsche Bank (DB)
Q3 2007 Earnings Call
October 31, 2007 4:00 am ET
Wolfram Schmitt - Head of Investor Relations
Anthony di Iorio - Chief Financial Officer
David Williams - Fox-Pitt Kelton
Jeremy Sigee - Citigroup
Michael Rohr- MainFirst Bank
Dieter Hein - Fairesearch
Philipp Zieschang - UBS
Jon Peace - Lehman Brothers
Stuart Graham - Merrill Lynch International
Kian Abouhossein - JP Morgan
Joachim Muller - Cheuvreux
Carsten Werle - Oppenheim Research
Stefan Stalmann - Dresdner Kleinwort
Georg Kanders - WestLB
Anke Reingen - Execution
Kinner Lakhani - ABN Amro
Good morning, ladies and gentleman. Welcome to the Deutsche Bank analyst call. (Operator Instructions).
We will now join you in the analyst call with Dr. Wolfram Schmitt, Head of Investor Relations. Thank you.
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As usual our disclosure today is supported by a variety of documents. The earnings release, a financial data supplement, the full interim report and a set of slides, which we will refer to.
All products, as you know, are carrying the usual disclaimer regarding forward-looking statements. In the interests of time, I will not read that out to you, but I trust that all of you would have read it before we start.
With that, Tony, I think you start your presentation and then we will go into the Q&A session right after that. Thank you. Tony?
Anthony di Iorio
Thank you, Wolfram, and good morning, everyone. As we announced this morning, our earnings in the third quarter of 2007 were EUR1.4 billion pre-tax, EUR1.6 billion after-tax and these numbers are disclosed on page three of our analyst presentation.
The quarter was characterized by a loss in trading positions in Investment Banking and in fact, an overall loss in the CB&S segment reflecting the impact of market conditions. We are pleased though, that the stable businesses of Global Transaction Bank, Asset and Wealth Management and the Private and Business Clients segment performed very well with earnings of EUR832 million for the quarter.
We also had strong contribution from Corporate Investments and a positive impact from tax credits and I will go through these in detail in just a minute. We are happy also to report that our Tier 1 ratio for the quarter was up. It was 8.8% and that, we believe, demonstrates our commitment to strong capital management.
Before I get into the details, I just want to reflect back on a disclosure we made on the 3rd of October regarding the anticipated results for the quarter and just compare those to where our results for the quarter are.
On the 3rd of October, we indicated that our expected pre-tax income would be EUR1.2 billion, and in fact, it came in at EUR1.4 billion. Our net income, we said, would exceed EUR1.4 billion, and it did at EUR1.6 billion. Our CB&S segment, at the time we forecasted would have a loss of between EUR250 million and EUR350 million, and the loss was EUR179 million.
Our sales and trading in three selected areas that we've highlighted, we anticipated would be in the range of a loss of EUR1.5 billion. In fact, the number is EUR1.560 billion. And finally, on leveraged finance, we said that we expected a write-down of up to EUR700 million in the quarter, and the write-down, in fact, was EUR603 million.
As we go through this presentation, we're also going to provide additional information on the exposures that we had at the beginning of the quarter and where we ended at the end of the quarter.
On page four, you can see what happened with our pre-tax, our ROEs, rather, 19%, which we said are anticipated, or our target was 25% over the cycle, and the 19% helped us, or contributed to a reduction, but, still for the nine months, we are at 33%. Our diluted earnings per share are at 11.13%.
If you turn to page five, we present the same statistics on a target definition basis, and this excludes some gains in our Corporate Investment segment principally, and as you can see from the chart, the target definition, pre-tax ROE for the quarter was 12% as compared to 25% for the third quarter last year. And our EPS, on a diluted basis, was EUR1.76 for the quarter compared to EUR2.11 for the prior quarter.
Turning to page seven, income before taxes, we report a decline of 19% from the third quarter last year, although the mix of these earnings is very different because of the circumstances in the third quarter. So, that's the EUR1.4 billion I commented earlier. On the full year basis, we are up on nine months 14% compared to the prior year at 7.3%.
Within these numbers, we had EUR606 million of gains in our Corporate Investment segment. EUR305 million of those relate to the sale of Industrial Holdings and then recent investments, the [Washer] Bank stake, the option on that stake, rather, which is a derivative that's managed or carried in Corporate Investments, and the final gain on the sale of our building in 60 Wall Street, New York, were EUR301 million.
In the third quarter of '06 the Corporate Investment sector contributed EUR216 million. So, while we had EUR600 million this quarter, that number is up from the EUR217 million from last year.
If you turn to the next page, eight, we disclose our net income, which is up 31% to EUR1.6 billion and in fact, higher than our pre-tax. And as we indicated in our earnings release, there were three principal reasons for that.
The first is the one-time impact of the change in German tax law on our provisions for deferred taxes, which had been accrued at the higher rate, so that was re-measured and adjusted this quarter, and that was a credit.
The second is the utilization of some capital losses, which in the United States can only apply against capital gains. We did have capital gains, principally on the sale of the 60 Wall Street building. And so, we were able to reflect those this quarter, the effect of those capital losses, and finally, through the resolution of some outstanding tax matters with the revenues. So as a result, we showed that increase.
On a guidance basis, the rate for this quarter probably, would have been, not probably, would have been below 30%, absent these items, and a lot of that is due to a reduction in our global rate mix, because many of the losses that we experienced in CB&S particularly were in the US, which is our highest tax jurisdiction. So, the rate would have been just under 30%.
Going forward for 2008, we reiterate our guidance of 33% to 35%. So, the tax rate this quarter, even before these charges, is lower than what we would anticipate it being as we go forward. As we indicated in some earlier calls, only about a quarter, 25% of our income, is earned in Germany. So, the impact of the reduction, apart from this one-time large benefit would be smaller in future quarters, going up.