Deutsche Bank's profit streak ends with big lawsuit provision

By Tom Sims and Matthias Inverardi

FRANKFURT (Reuters) -Deutsche Bank posted its first loss in four years in the second quarter after setting aside 1.3 billion euros ($1.41 billion) as a provision for an investor lawsuit, scuppering plans for a stock buyback and triggering a 7% drop in shares.

The loss at Germany's largest lender broke a profit streak of 15 consecutive quarters, in a setback for the bank's turnaround under CEO Christian Sewing.

The bank also increased its forecast for possible credit losses, and its finance chief said the bank was unlikely to conduct a second share buyback this year, sending shares lower.

Deutsche executives nevertheless said the quarter was an aberration and that the bank should still meet its targets.

The loss is "solely due to the legal provision", CEO Christian Sewing wrote in a memo to employees.

He said "our operating strength is evident" and that the bank would meet its financial goals.

The bank's quarterly earnings are part of a flurry of reports from Europe's biggest banks, as investors search for evidence of whether gains from higher interest rates have lost steam and political turmoil in France and the U.S. and a change of government in Britain have affected sentiment.

Analysts with RBC Capital Markets and KBW said Deutsche's underlying results were good.

The legal issue at Deutsche centres around the no-frills Postbank, with its millions of clients and roots in the country's postal system, which Deutsche began acquiring during the 2008 global financial crisis.

With the purchase, Deutsche was seeking to broaden its reach in Germany with a steady income stream after years of rapid international expansion.

Instead, Postbank has evolved into a source of consumer complaints, regulatory scrutiny, labour strife and the long-running and costly lawsuits.

The suits, which claim Deutsche underpaid for the Postbank acquisition, have been bouncing around courts for years.

Deutsche said in April that although it strongly disputed the claims, it had decided to post a provision for the cases of 1.3 billion euros. The surprise move led to a 9% drop in shares.

WEAK GERMAN ECONOMY

The bank is navigating a weak economy in its home market, which Germany's central bank this week said was growing more slowly than it had expected and that hopes of an imminent industrial rebound had faded.

Regulators have said 2024 could be more challenging for German bank profits as a property crisis weighs and loans go bad.

The bank is also trying to cut costs to meet its 2025 targets, which most analysts believe will be hard to reach.

Deutsche's biggest earner in the second quarter was its investment bank, which has operations from Sydney to New York. Revenues rose 10% from a year earlier, in line with expectations, though it was behind a 12% rise reported by France's BNP Paribas on Wednesday and jumps of more than 30% at some big U.S. competitors.

In contrast with the investment bank, revenues at Deutsche's retail and corporate banking divisions fell.

As part of a 2019 revamp, Deutsche had tried to rebalance the lender so that the volatile investment bank - once its problem child - carried less weight. But it is forecast to remain the largest division in the coming years.

Within the investment bank, origination and advisory was a source of strength in the quarter, with revenue rising 88%, compared with expectations of a 66% increase and outpacing gains at big U.S. competitors.

Revenue for fixed-income and currency trading, one of the bank's largest businesses, dropped 3%, slightly worse than expectations for a nearly 2% decline. They were up 5% for U.S. banks, according to Jefferies.

The bank's increase in expectations for credit losses follows two corporate defaults, which Deutsche did not disclose by name.

Deutsche has been contending with fallout from commercial real estate, which has come under pressure in the United States and Germany.

CFO James von Moltke said that the recovery in commercial real estate has been slower than he had anticipated.

($1 = 0.9222 euros)

(Reporting by Tom Sims and Matthias Inverardi; additional reporting by Stefania Spezzati; Editing by Miranda Murray, Jamie Freed and Barbara Lewis)