Business

Wednesday July 29, 2009

Deutsche Bank, BBVA braced slump by raising bad loan provisions


FRANKFURT/MADRID: Two of Europe’s biggest banks, Deutsche Bank and Spain’s BBVA, braced for the economic slump by increasing bad loan provisions in the second quarter.

Deutsche’s second quarter pre-tax profit more than doubled from a year ago to 1.3 billion euros (US$1.86bil), but fell short of a 1.47 billion euro average forecast from analysts.

BBVA, Europe’s sixth biggest bank, said it raised bad loan provisions, knocking its first half net profit down 10% from a year earlier to 2.8 billion euros. That figure still beat an average forecast of 2.5 billion euros.

Bad loans as a percentage of BBVA’s total rose to 3.2% at the end of June from 2.8% at the end of March. But there was a powerful showing from retail banking, the main driver for earnings, with net interest income climbing 23.5% in the first half.

The results follow bumper investment bank earnings from US rivals Goldman Sachs, JP Morgan and others, but European banks are showing strains on bad debts similar to their US counterparts.

Switzerland’s Credit Suisse last week posted better than expected profit on the back of market share gains in investment banking.

Other European banks are also expected to show strong investment banking earnings as well as rising bad debts when they report over the coming weeks. — Reuters

“The strong capital generation in the first half shows that BBVA has no need to hike capital, which had concerned the market,” Caja Madrid Bolsa’s Javier Berna said.

Investment banking accounted for 828 million euros of Deutsche’s pre-tax profit of 1.32 billion euros, underpinned by a rise in revenue from trading debt related products and a reduction of loss making toxic assets on its books.

Profits from the investment division were dampened by a move to reduce risky trading positions and assets, it said.

Deutsche’s earnings show that “provisions are something which need to be looked at again,” JP Morgan analyst Kian Abouhossein said.

Deutsche, Europe’s eighth biggest bank by market value, said its provisions for credit losses rose to 1 billion euros last quarter, a near sevenfold rise from a year earlier and almost double the provisions made during the first quarter.

The increase “reflects the generally weaker credit environment” and includes some 508 million euros in provisions related to assets which are being reclassified under International Accounting Standard 39, the bank said.

Deutsche Chief Executive Josef Ackermann said the Frankfurt-based bank was well prepared for an uncertain environment, but said employment levels and real estate remained a worry for broader economic health.

Pressure on loan portfolios is likely to continue increasing substantially as private and corporate insolvencies mount and default rates rise, Deutsche Bank said.

The bank raised optimism it could be through the worst as it said the number of new bad loans fell by 19% in the second quarter, the lowest level in the last four quarters, repeating a trend seen at other Spanish retail banks.

The threat of rising bad debts this year and into 2010 could put a strain on balance sheets and prompt banks including BBVA and Deutsche Bank to raise capital, analysts reckon.

Deutsche boosted its tier 1 capital ratio, a measure of balance sheet strength, to 11% from 10.2% at the end of March. - Reuters


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