The FINANCIAL — John Cryan, Chief Executive Officer, said: “In 2017 we recorded the first pre-tax profit in three years despite a challenging market environment, low interest rates and further investments in technology and controls. Only a charge related to US tax reform at the end of the year meant that we had to post a full-year after-tax loss. We believe we are firmly on the path to producing growth and higher returns with sustained discipline on costs and risks. The Postbank merger and partial flotation of DWS are both advancing well. We have made progress, but we are not yet satisfied with our results.”
Pre-tax profitability reflects a lower burden from legacy items. The bank reported income before income taxes of EUR 1.3 billion for the full year 2017, versus a pre-tax loss of EUR 810 million in 2016. The year-on-year improvement was predominantly due to significant reductions in impairments and litigation charges.
The bank reported a fourth-quarter loss before income taxes of EUR 1.3 billion, versus EUR 2.4 billion in the prior year quarter. This improvement was also driven by a considerable reduction in litigation and impairment charges. The fourth quarter 2017 result reflected a weak revenue environment together with a negative impact from the agreement to sell a portion of the retail business in Poland and restructuring charges mainly related to the planned merger of Private & Commercial Clients Germany and Postbank.
Net income was heavily affected by US tax reform. As announced on 5 January, the bank recognised a non-cash charge of approximately EUR 1.4 billion arising from a valuation adjustment on its US Deferred Tax Assets (DTAs). Accordingly, Deutsche Bank reported a net loss of EUR 0.5 billion for 2017. Adjusting for the impact of the DTA-related charge, Deutsche Bank would have made full-year net income of around EUR 900 million versus a net loss of EUR 1.4 billion in 2016.
For the fourth quarter, Deutsche Bank reported a net loss of EUR 2.2 billion, likewise predominantly reflecting the charge related to US tax reform and compared to a net loss of EUR 1.9 billion in the prior year quarter. Going forward, the reduction in the US federal tax rate is expected to have a positive impact on net income, according to Deutsche Bank.
Lower revenues reflected the impact of strategic business disposals and challenging market conditions. Full-year 2017 revenues were EUR 26.4 billion, down by 12%, or EUR 3.6 billion, year-on-year. Of this decline, approximately half arose from strategic business disposals including Hua Xia Bank, Abbey Life and Private Client Services in 2016. Moreover, the agreement to sell a portion of the retail business in Poland and losses from country exits negatively impacted revenues in 2017. A third major item was Debt Valuation Adjustments and the tightening of spreads on the bank’s own debt measured at fair value, which negatively affected revenues by EUR 513 million during 2017. Adjusted for these items, full-year revenues would have been down by approximately 5% year-on-year, driven by low financial-market volatility and muted client activity, notably in the fourth quarter, and persistent low interest rates.
Strategic business disposals particularly impacted fourth-quarter net revenues which fell 19% to EUR 5.7 billion. Adjusted for these and the other items mentioned above, fourth-quarter revenues would have been down 10% due again to low volatility and client activity in financial markets and continuing low interest rates.
Credit quality was very good. The provision for credit losses was down 62% to EUR 525 million in the full year 2017, and down 74% to EUR 129 million in the fourth quarter. In the quarter, the bank recorded reductions in provisions in the Corporate & Investment Bank, partly reflecting single name releases in the shipping portfolio. Good credit quality and selective loan sales in the Private & Commercial Bank helped to improve the result further.
Noninterest expenses were down substantially thanks to the lower financial burden of legacy items. Full-year 2017 noninterest expenses were down 16%, or just under EUR 5 billion, to EUR 24.6 billion. This was due to the absence of the Abbey Life impairment charge in 2016 and to a significant reduction in litigation charges. Provisions for litigation charges including additions for settlements achieved were largely offset by gross releases of provisions made possible by lower-than- anticipated settlement amounts and matters resolved without action being taken. Adjusted costs were down 4% to EUR 23.8 billion as higher variable compensation costs were more than offset by reductions in non-compensation costs.
Fourth-quarter noninterest expenses were EUR 6.9 billion, down by 23%, or EUR 2.1 billion, largely driven by the non-recurrence of an impairment for Abbey Life and significantly lower litigation expenses. These were partly offset by restructuring and severance costs primarily relating to the planned merger of Private & Commercial Clients Germany and Postbank. Adjusted Costs were EUR 6.3 billion, up 3%. This reflected the normalisation of our variable compensation framework, which more than offset reductions in non-compensation costs.
The bank currently targets adjusted costs to be EUR 23 billion in 2018, higher than the EUR 22 billion previously targeted. The earlier target included approximately EUR 900 million of cost savings to be achieved through business disposals that subsequently have been delayed or suspended. Some of these savings are expected to flow into 2019 results. The increase in adjusted costs is expected to be more than offset by revenues retained due to the delayed or suspended disposals.
The capital ratio remains strong. The fully loaded CRR/CRD4 Common Equity Tier 1 (CET 1) ratio rose to 14.0% at the end of the quarter, up from 13.8% at the end of the third quarter. This reflected a reduction in Risk Weighted Assets (RWA) of EUR 11 billion during the quarter, arising primarily from lower Operational Risk RWA. The leverage ratio was stable at 3.8% (fully loaded) while leverage exposures were down EUR 25 billion to EUR 1,395 billion.
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