Deutsche Trims U.S. Mortgage Holdings in Q2
Deutsche Bank (DB) took its turn at the earnings table Thursday and said that second-quarter net profit fell 64 percent to 645 million euros ($1 billion) after it wrote-down another 2.3 billion euros ($3.6 billion) on its exposure to mortgage-backed securities -- mostly Alt-A, it should be noted -- as well as exposure to troubled bond insurers. While the profit figures beat analyst estimates, Deutsche got there largely by selling assets and via tax benefits, rather than via strong core performance; the writedown total exceeded most analyst estimates, according to a report by Bloomberg News. That said, the bank turned a profit, something that U.S. banks have been hard-pressed to say for themselves this earnings season. The majority of writedowns at DB came from residential mortgage-backed securities, which represented 1 billion ($1.57 billion) of the 2.3 billion euros in total write-downs. Exposure to monoline insurers drove another 500 million euros ($782.7 million) in write-downs, as well. "The second quarter of 2008 proved to be another very challenging quarter for the banking industry," said CEO Josef Ackermann. "After stabilizing in April, markets again deteriorated during June, with the result that the first half-year of 2008 turned out to be one of the most difficult for many years." Deutsche moved to reduce its exposure to subprime ABS CDOs during the quarter, selling off assets, and said that it had reduced overall gross exposure to mezzanine subprime ABS CDOs by 274 million euros ($428 million), while cutting super senior gross exposure from 1.18 billion euros ($1.85 billion) to 1.08 billion euros ($1.7 billion). Gross exposure to Alt-A ABS CDOs dropped from 489 million euros ($765 million) at the end of Q1 to 381 million euros ($596 million) by the end of the second quarter, as well, Deutsche said. Mortgages and monolines Deutsche reported a steep cut in its gross U.S. RMBS exposure as well, as it sold off positions between Q1 and Q2. At the end of the second quarter, the bank held 5.9 billion euros ($9.17 billion) of gross exposure to the U.S. residential mortgage business -- a steep falloff from the 7 billion euros ($11 billion) in exposure maintained at the end of Q1. The vast majority of DB's exposure to mortgages, however, is in the form of Alt-A mortgages; which means that while it has seen its losses remain more muted thus far relative to global banking counterparts, losses may yet prove problematic as Alt-A mortgages come under increasing pressure. At the end of the second quarter, 72 percent of total U.S. mortgage exposure at Deutsche was in Alt-A; 89 percent of Alt-A and subprime assets were in the 2007 vintage, as well. Net exposures, of course, were well below the gross numbers reported; but much of the hedging activity around the RMBS assets held is tied to monoline bond insurers. And HW readers know how well things have been going in that sector. Looking into monoline exposure, some interesting trends emerge: for one thing, Deutsche has written-down the value of its counterparty exposures 83 percent relative to the notational amount of the contracts. Deutsche saw its so-called Level 3 assets -- those most difficult to value, where unobservable pricing inputs exist -- remain flat at 6 percent of total assets, 88 billion euros ($137.1 billion). Disclosure: The author held no positions in DB when this story was published; other indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.