Deutsche Bank Chief Says Markets Are Stabilizing (Update2)

By Elena Logutenkova

Sept. 4 (Bloomberg) -- Deutsche Bank AG Chief Executive Officer Josef Ackermann told investors there are signs that financial markets are stabilizing and said Germany's biggest bank has had no difficulty borrowing.

``I am optimistic about the environment globally for financial institutions,'' Ackermann said today in a statement that helped raise European financial-services stocks. Deutsche Bank rose 2.6 percent to 93.94 euros as of 2:05 p.m. in Frankfurt trading, while UBS AG, Europe's biggest bank, advanced 1.8 percent and Credit Suisse Group gained 1.4 percent.

``Every positive statement from a member of the financial sector helps to relieve investors,'' said Peter Braendle, who helps manage about 63 billion Swiss francs ($52 billion) in assets at Swisscanto Asset Management in Zurich.

The German bank gets about half its revenue from sales and trading and last month described market conditions as ``very challenging.'' UBS analysts cut their 2008 earnings estimates for European banks including Deutsche Bank by 5 percent today, citing the rout in the credit markets prompted by rising U.S. subprime mortgage defaults.

``The turbulent market conditions during the month of August inevitably affected Deutsche Bank, notably in sales and trading and corporate finance,'' Ackermann said in today's statement. Even so, the CEO said he was ``pleased'' with the performance of the consumer-banking and money-management units last month.

The company aims to raise pretax profit excluding one-time gains and costs to 8.4 billion euros ($11.4 billion) in 2008 by expanding what Ackermann has called ``stable'' businesses to help compensate for swings in investment-banking revenue.

Subprime Investments

Deutsche Bank has continued to be able to access financing, the CEO said. Asset-backed commercial-paper affiliates to which Deutsche Bank provides funding hold assets of 32 billion euros and have no U.S. subprime mortgage investments, he said. Deutsche Bank consolidates the affiliates onto its balance sheet.

Companies that depend on commercial paper, debt due in 270 days or less, are facing funding shortages as investors refuse to buy debt secured by assets including subprime mortgages. IKB Deutsche Industriebank AG and Landesbank Sachsen Girozentrale had to receive emergency funding last month to keep them afloat after vehicles that they supported couldn't refinance in the markets.

Ackermann said at a conference in Frankfurt today that Deutsche Bank pointed out problems at IKB to regulators. IKB had to get a 3.5 billion-euro bailout from KfW Group and German banking associations to cover losses tied to subprime investments, 10 days after saying they wouldn't affect earnings.

Risk Management

Keeping quiet would have done more damage to the German banking market, Ackermann said. Companies should learn from the current crisis not to invest in assets and markets that they don't understand, he said, adding that Deutsche Bank's credit risk is ``well-controlled.''

``The fact that Ackermann pointed out his risk management was working is very good,'' said Michael Cloth, an equity analyst at Dresdner Bank AG. ``Still, about two-thirds of Deutsche Bank's earnings come from investment banking. We remain careful and prefer stocks with a more balanced earnings mix.''

The bank also has a pipeline of loans to buyout companies valued at 29 billion euros and so-called equity bridges of 750 million euros, Ackermann said. The company warned last month that revenue from leveraged finance would drop because of increasing risk aversion.

Deutsche Bank is among the lenders being forced to hold onto 9 billion pounds ($18.1 billion) of loans for Kohlberg Kravis Roberts & Co.'s purchase of U.K.-based pharmacy chain Alliance Boots Plc, as investors balk at riskier assets.

Profitability Forecast

Ackermann declined to comment at the conference on whether the bank's pretax return on equity target of 25 percent is endangered. Developments during the rest of this year will show whether the company will meet its targets, he said.

Pretax return on equity in the first half was 38 percent. Deutsche Bank's second-quarter net income rose 31 percent to 1.78 billion euros, helped by gains in trading revenue, which benefited from ``favorable market positioning'' on credit.

Deutsche Bank is disbanding a London-based team of traders that lost more than 100 million euros in the last month on wrong- way bets on credit markets using the firm's money, a person familiar with the situation said on Aug. 30. Some members of the 14-person team are leaving the bank and others are being assigned to new posts, the person said.

Deutsche Bank shares have fallen 7.5 percent this year, valuing the company at 49.5 billion euros.

To contact the reporter on this story: Elena Logutenkova in Frankfurt at elogutenkova@bloomberg.net