Profits at IFSC-based Depfa Bank fell short of expectations in the first three months of the year as costs rose sharply.

Results issued by the public-sector lender yesterday show net profits of €120 million for the first quarter, down from €125 million a year earlier. Analysts had been expecting profits of €122 million.

Depfa said costs had climbed by 56 per cent to €53 million in the first quarter, putting the increase down to geographic expansion, product development and project-related spending.

The bank, which has German roots, has been investing effort in expanding its business in the US.

Depfa said it should be able to achieve earnings of up to €600 million next year by moving into new markets and offering new products. For this year, the bank reaffirmed a profit target of up to €500 million. Revenues in the first quarter were stable year-on-year at €193 million.

Asset sales were nearly two-thirds lower than the previous year at €35 million, while net commission was halved to €10 million. Depfa earns commission income from selling investment bank-style services to governments looking to manage their debt.

A spokesman said the drop was due to a dip in fees from credit derivatives (a volatile business).

Dirk Becker, analyst with Kepler Equities, said the bank's costs were very high. "And the net commission income is a disappointment - it has halved. But net interest income is very good. In all, they are in line with what was expected," he added.

A month ago, Depfa abandoned the sale of its German subsidiary, Depfa Deutsche Pfandbriefbank, after failing to find a buyer. The bank's shares have fallen by about 5 per cent since the start of this year, while the MDAX index of German mid-cap companies has risen almost 4 per cent.

Depfa shares rose 15 cents to €11.86 yesterday. - (Additional reporting, Reuters)