Reducing the value of assets and lawsuit expenses pushed Deutsche Bank into a big and unexpected fourth quarter loss of €2.15 billion ($2.91 billion).
The net loss for the October-December period compared to a €186 million profit a year ago. Analysts surveyed by FactSet expected a bare profit of €62 million.
Deutsche Bank is reshaping its business to meet new regulatory requirements for banks to keep larger financial buffers against losses in the wake of the 2007 financial crisis.
Meeting the new requirements means dropping some risky investments and assets. To do that, the bank took accounting losses of €1.9 billion for the fallen value of businesses it had acquired before 2003, and for risky assets and investments that it is in the process of selling off.
Expenses for litigation the bank is facing came to €1 billion. The bank faces lawsuits and investigations along with other big banks over the manipulation of the London Interbank Offered Rate interest benchmark in past years. The rate is used to price trillions of dollars in global contracts.
Co-CEOs Juergen Fitschen and Anshu Jain, who took over from Josef Ackermann last year, said the performance of the bank's core business was otherwise strong, and management recommended an unchanged dividend to shareholders of 75 euro cents a share.
They said the losses came from "the most comprehensive reconfiguration of Deutsche Bank in recent times."
Jain said that the bank's outlook for 2013 is better than it was at the same time in 2012, with the U.S. economy recovering and an easing of financial market turmoil from the euro currency union's drawn-out crisis over too much government debt in some countries.
He warned however that the bank's restructuring was "a journey that will take years, not months."
Like all global banks, Deutsche Bank is being pushed from an international effort, known as Basel III, to hold more capital as a buffer against losses. Basel III is a response to the financial crisis that began in 2007 when banks reported big losses on mortgage-backed securities in the United States and then worsened with the collapse of U.S. investment bank Lehman Brothers.
Building larger capital buffers can mean either raising capital by selling new shares, or by exiting risky investments and holdings. The riskier an investment, loan or security is considered, the more capital must be held to protect against losses on it.
Deutsche Bank has put many of these assets in a separate unit which will manage their disposal.
Jain said the bank's efforts during the year at selling off or writing down risky investments was the equivalent of selling €8 billion in new shares. Doing it by disposing of risky assets means that the bank avoided diluting existing shareholders' investments through the issuance of new shares.
By doing that the bank accelerated its progress toward meeting the Basel III goals, and narrowed the gap with competing banks that have been making faster progress than Deutsche Bank. The bank reached a Core Tier 1 capital ratio — the Basel III standard — of 8.0 percent of its loans, investments and other risky assets as of Dec. 31, 2012. That is 0.8 percentage point ahead of its goal. Basel III will eventually require the bank to have a 9.5 percent capital ratio by 2019.
Despite its reverse in the fourth quarter, the bank did post a net profit for the full-year of €665 million, though that was way down on 2011's €4.32 billion. On the revenue front, Deutsche Bank fared better. In the fourth quarter, revenue rose 14 percent to €7.9 billion from €6.9 billion. Full year revenue rose to €33.74 billion from €33.22 billion.
The company said last month that it would face reductions to earnings for the fallen value of businesses and assets, but did not say how big the accounting loss would be. Deutsche Bank's share price ended Thursday up 2.85 percent at €38.21.