Deutsche Bank's profit could be hit by up to 1.7 billion euros ($2.4 billion) thanks to loans that have dwindled in value as a result of the credit market crisis.
FRANKFURT: Deutsche Bank's profit could be hit by up to 1.7 billion euros ($2.4 billion) thanks to loans that have dwindled in value as a result of the credit market crisis, sources familiar with the situation said.
Chief Executive Josef Ackermann last week acknowledged the bank was heading for a rocky third quarter, flagging an upcoming revaluation of 29 billion euros of credit it had promised to clients.
Deutsche would normally farm these loans out to other banks, but it has become harder to sell on such debt in the wake of a credit squeeze that began with a wave of mortgage defaults in the US, and the bank now faces having to write down the value of these loans to reflect this.
One source familiar with the situation said the bank estimates that the credit is now worth between 4 and 6 per cent less than face value.
That would hit profit by up to 1.7 billion euros booked in the third quarter. In the same period a year ago, Deutsche made a net profit of 1.2 billion.
Deutsche, one of the world's biggest M&A banks, is now trying to get clients to renegotiate credit terms or drop deals to shrink the size of the fallout. The loss could also shrink if credit market conditions improve.
The bank declined to comment.
On Monday, Deutsche Bank's shares were down 1.6 per cent, underperforming the European banking sector and Germany's blue-chip DAX index.
''Concern that Deutsche Bank could face substantial write downs due to the credit crisis is weighing on the share,'' said one Frankfurt-based trader.
The potential loss is bigger than the estimates made by many analysts, some of whom are expecting as little as 500 million euros. Merrill Lynch has predicted up to $1 billion.
Many analysts privately admit, however, that making a forecast is difficult. ''The sector has a black box discount at the moment,'' said one.
Deutsche is hoping that some customers, which include private equity investors as well as big companies carrying out M&A transactions, will either accept new terms for the credit or in some cases drop the deals.
The bank can use its muscle to renegotiate the terms of the credit, which in turn makes it easier for them to sell to other banks and reduces the need for write downs.
Big banks can sometimes call in such favours from customers because of their lending clout.
''If you take a private equity buyer, the bank provides them with leveraged finance to do their deals,'' said one banker active in the market. ''So it's in their interest to keep the relationship
good.''
Deutsche's Ackermann has acknowledged his bank made 'mistakes' during the recent market turmoil and publicly called for 'transparency', demanding banks should come clean quickly about the full impact of the credit crunch on the bottom line.
But he also told Germany's Spiegel magazine in Monday's edition he saw 'initial encouraging signs' that financial markets were returning to normal.
Last week, investment bank Bear Stearns saw its profit plunge almost two thirds as the value of investments in risky subprime mortgages dipped.
Goldman Sachs and Lehman Brothers surprised investors, however, with unexpectedly good results.
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