(Bloomberg) -- Deutsche Bank AG said it will have to set aside more money than expected for souring debt, the second time this year it had to adjust its guidance.
Germany’s largest lender on Thursday reported a 42% increase in third-quarter profit, helped by gains at the investment bank and in asset management. But lower revenue in the main lending units and a doubling of credit provisions from a year ago weighed on the results.
Deutsche Bank said it now expects provisions for credit losses of about €1.8 billion for the full year, or roughly 38 basis points of its loan book. Earlier this year, it had already raised its guidance to slightly above 30 basis points.
“It feels the difficult German economic environment has started to impact Deutsche Bank revenues” and may be reflected in “higher provisions and increased provision guidance,” JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan wrote in a note.
Chief Executive Officer Sewing said the increase in souring loans was only temporary, and that provision for commercial real estate were already coming down again. Sewing has vowed to improve profitability and return more than €8 billion ($8.6 billion) to shareholders over the medium term, building out fee businesses as the tailwind from higher interest rates fades.
Deutsche Bank fell as much as 4.9% in Frankfurt trading, paring gains this year to 26%.
Chief Financial Officer James von Moltke said on a call that the higher credit provisions in the third quarter mainly reflected the impact of Deutsche Bank’s integration of retail lender Postbank, which had led to a backlog of collections and a change in models.
“We believe this is only a transitory increase, especially as our risks in commercial real estate financing are now receding and forward indicators are healthy,” Sewing said in a message to employees.
Lower interest rates, meanwhile, weighed on income from lending to companies and consumers. Revenue at the corporate bank declined 3% from a year earlier, while it fell 1% at the private bank, which combines the retail and wealth units.
Income at the investment bank, the biggest contributor to the group’s top line, rose 11%, the same increase as in the asset management business. Deutsche Bank outperformed peers such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. in fixed income trading.
Trading is “off to a good start” in the fourth quarter, CFO von Moltke said in an interview on Bloomberg TV. “Usually we see strength around the US election as investors and also corporates need to position.”
Revenue from advising on deals and stock and bond sales increased 24%. Sewing has built out the advisory business with last year’s purchase of Numis Corp. to boost fee income. Deutsche Bank is also one of the few lenders to take advantage of a downturn in dealmaking by picking up marquee bankers from peers such as Bank of America Corp., Credit Suisse, Morgan Stanley and Lazard Inc.
While loan loss provisions rose, Deutsche Bank released about €440 million in litigation provisions in the quarter. That’s after it settled a majority of legacy disputes related to its acquisition of Postbank years ago.
Deutsche Bank said it has recently applied with the European Central Bank for approval to resume share buybacks, though any such moves won’t happen until next year. It didn’t give details on the size of such a program.
Von Moltke reiterated that Deutsche Bank has no plans at this point to get involved in the battle for Commerzbank AG, while indicating that the lender could look at opportunities for deals in its home market at a later stage.
“Domestic consolidation is clearly on the list of things that you look at as you observe your option set,” he said in the interview. “Industrial logic for bank mergers makes sense, but we needed time to be fully ready, and that time hasn’t come.”
--With assistance from Oliver Crook and Macarena Muñoz.
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