By Arno Schuetze
FRANKFURT (Reuters) - Deutsche Bank's new boss John Cryan set about cleaning up Germany's biggest bank on Thursday, unveiling a record pre-tax loss of 6 billion euros ($6.7 billion) in the third quarter and warning investors of a possible dividend cut.
Cryan became chief executive in July with a promise to cut costs. He is accelerating plans to shed assets and exit countries to shrink the bank and is preparing to axe about 23,000 jobs, or a quarter of the bank's staff, sources told Reuters last month.
"The news is not good, and I expect a number of you will be very disappointed by it," Cryan said in an open letter to staff. He warned them bonuses would be cut as staff needed "to share something of the burden" of the losses.
It is another blow to corporate Germany, which has been rocked by a scandal at Volkswagen (XETRA:VOWG) after the auto-maker admitted to cheating U.S. emissions tests.
In the latest sign that Europe's largest economy is feeling the pain from a slowdown in emerging markets, Germany's exports plunged in August by their largest amount since the 2008-2009 financial crisis.
Shares in Germany's flagship lender fell 3 percent at first, but were up 0.8 percent at 25.68 euros by 1126 GMT, valuing it at $40 billion, making it Europe's 14th biggest bank.
Its share price has suffered under stalled reforms and rising costs on top of fines and settlements that have pushed the bank to the bottom of the valuation rankings of global investment banks.
Still, traders and analysts said Thursday's share rise was a reflection that Cryan was taking action to tackle long-standing problems, and it also appeared unlikely the bank would have to raise capital soon despite the losses.
WIND OF CHANGE
It will take a 2.3 billion euro writedown at its investment banking unit, 16 years after acquiring the U.S. investment bank Bankers Trust. It will also take a further 3.5 billion euro impairment on its Postbank retail bank and 600 million more on a stake in China's Hua Xia Bank. It has earmarked the two assets for disposal.
"Longtime board members often hesitate to do drastic cuts. Now there's a wind of change," said one of the bank's top 10 investors, who asked not to be identified. "Now it is clear that the bank is not planning a cap hike in the short term," he added.
Fund manager Ingo Speich from Union Investment, one of the top 20 shareholders, said he expects some executives who are responsible for mistakes of the past to be replaced.
"Saying now that the 2015 dividend may be skipped is mainly a signal to staff," he told Reuters, adding that cutting investment bankers' bonuses would help recoup investor confidence.
Most of the writedown is on goodwill, which does not affect the bank's capital position. Deutsche Bank (XETRA:DBKGn) said its core capital ratio stood at about 11 percent at the end of September, compared with 11.4 percent at the end of June.
COSTLY LITIGATION, ASIA TURMOIL
As in the second quarter, the bank is setting aside another 1.2 billion euros for fines and settlements. It has been dogged by legal worries including investigations into possible manipulation of benchmark currency rates and dealings with Iran.
Cryan said he expected litigation costs "to continue to burden us in future quarters."
Standard & Poors said the goodwill rightdowns and litigation provisions would not affect Deutsche's credit ratings.
The costly litigation and turmoil in Asian markets have constrained Cryan's ability to reform. His job has been even more difficult because Deutsche is also the last big investment bank to try to slim down, long after rivals such as UBS, Barclays (LONDON:BARC) and Credit Suisse (SIX:CSGN).
But after initially sticking with an expensive universal banking model, it has reined in ambitions and worked to trim operations. After tax, Deutsche said, it is expecting a loss of 6.2 billion euros for the quarter. Without the impairments of goodwill and intangibles it would have lost 400 million euros in the July to September period.
Analysts on average had expected about 1 billion euros in third-quarter net income, based on three estimates, according to Thomson Reuters data. Cryan said in July that raising additional equity would not solve the bank's core problem of low financial returns. But some analysts said a capital increase is still likely - probably next year.
"We think a capital increase is unlikely until 2016, after the cost saves and strategy has been bedded down. In our opinion a capital raise of up to 6 billion euros is possible," analysts at Citi said in a note.
The bank also warned investors, who have enjoyed stable dividend payments since 2009, it may cut or suspend payouts in 2015.
The bank will report its results on Oct. 29 along with more details of its so-called Strategy 2020, which will include massive and expensive cuts in its overhead operations, its retail and its investment bank.