Deutsche Bank and HBOS hit by writedowns

The major European banks have gotten into the swing of things with their own reporting season. Today, Deutsche Bank and HBOS reported earnings.

Deutsche Bank recorded a pre-tax profit of 642 millioneuros after writedowns of $3.6 billion due to the credit crunch. This takes Deutsche’s total writedowns toover $10 billion since the credit crunch began. This is not a Merrill, Citi, or UBS-style writedown, but significant nonetheless.

Deutsche said its writedowns came from “residential mortgage-backed securities [predominantly Alt-A], monoline insurers, commercial real estate, leveraged finance loans and loan commitments, and other positions.”
WSJ, 31 Jul 2008

HBOS reported first half profits of £848 million (nearly $1.7 billion), down from last year’s £2.96 billion (almost $6 billion). With loan losses only increasing by 36% to £1.3bn in the first half and a less-than-estimated writedowns of £1.1 billion ($2.2 billion) for debt investments, the stock rallied on the news.

Overall, the two had decent results. However, one reason to focus in on Deutsche Bank is their exposure to the U.S. commercial real estate (CRE) market. Their U.S. subsidiary, Taunus Corp. has the fifth largest balance sheet in the United States at over $850 billion in assets. Deutsche Bank is a major player in the U.S. CRE market and no major losses there have yet to be recorded during the present downturn. That said, many commercial enterprises are beginning to go bankrupt as the economic slowdown in the U.S. takes hold — Mervyn’s and Bennigan’s some of the most recent. Even former high-fliers like Starbucks are shedding retail outlets, which should further lower CRE rents in the US.

As for HBOS, ther results are not yet reflective of the gathering economic and mortgage turmoil in the UK. HBOS is one of the leading UK mortgage providers and one should certainly expect greater loan losses in the second half of 2008 than in the first half.

To date, there have been nearly $480 billion in total writedowns from the global financial sector since the credit crisis began. We should expect many more as the real economy bite has yet to be felt on balance sheets.

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