Deutsche Bank (DB) Q2 Earnings Swing Up, Costs Rise - Analyst Blog

Deutsche Bank AG DB reported net income of €818 million ($904.5 million) in the second quarter of 2015, rising over twofold from the prior-year quarter. The bank reported profit before income taxes of €1.2 billion ($1.3 billion), up 34% year over year.

Lower provision for credit losses along with higher revenues were the positives. However, higher non-interest expenses due to litigation provisions were a concern.

Performance in Detail

The bank reported net revenue of €9.2 billion ($10.2 billion) in the reported quarter, up 17% year over year. The rise was attributed to increased revenues in all segments.

Revenues at Corporate Banking & Securities (CB&S) Division were up 23% from the prior-year quarter to €4.3 billion ($4.8 billion). The increase stemmed from higher market volatility and favorable movements in foreign exchange rates.

The Private & Business Clients (PBC) segment’s revenues totaled €2.4 billion ($2.7 billion), in line with the prior-year quarter. Notably, higher revenues from Investment & insurance products, credit products and other products were offset by reduced deposit revenues and postal and supplementary Postbank services revenues.

At Deutsche Bank’s Global Transaction Banking (GTB) business, revenues of €1.1 billion ($1.2 billion) were up 11% from the year-ago figure. Strong volumes and favorable foreign exchange rate movements primarily aided the results.

Meanwhile, the Deutsche Asset & Wealth Management (DeAWM) segment posted revenues of €1.4 billion ($1.5 billion), up 25% year over year. The upsurge was driven by solid performance in almost all components of revenues.

Non-Core Operations Unit (NCOU) recorded revenues of €201 million ($222.3 million), exhibiting a significant year-over-year increase of €253 million. The increase was mainly due to de-risking gains.

The provision for credit losses descended 39% from the year-ago period to €151 million ($167 million).

Non-interest expenses of €7.8 billion ($8.6 billion) were up 17% from the year-ago period. The rise primarily resulted from higher litigation-related charges and unfavorable foreign exchange rate movements. Notably, non-interest expenses included litigation charges of €1.2 billion ($258.5 billion) in the reported quarter.

Deutsche Bank’s Common Equity Tier 1 (CET1) capital ratio (pro-forma Capital Requirements Regulation (CRR)/Capital Requirements Directive 4 (CRD 4) fully loaded) stood at 11.4% as of Jun 30, 2015 compared with 11.5% as of Jun 30, 2014. Leverage ratio, on an adjusted fully loaded basis, was 3.6% as of Jun 30, 2015 compared with 3.4% as of Jun 30, 2014. Risk-weighted assets valued €416 billion ($461.5 billion) as of Jun 30, 2015 compared with €394 billion ($478.9 billion) as of Dec 31, 2014.

Strategic Efforts

In Apr 2015, Deutsche Bank announced its “next phase of strategy”. Restructuring the bank’s operating model, the company intends to achieve annual gross savings of €3.5 billion for which one-time cost of €3.7 billion will be incurred. In its CB&S segment, the company intends a reduction in assets by around €200 billion.

The company is considering re-IPO of Postbank and anticipates its deconsolidation by the end of 2016. The company intends to invest more than €1.5 billion in GTB and Deutsche AWM. Focusing on key markets, the company intends to “rationalize” its global footprint by exiting some nations or trimming its presence.

Our Viewpoint

Amid the worldwide economic volatility, the company is focused on building its capital level. Strategy 2020 efforts are encouraging and we expect the initiative to help improve operating efficiency. However, the related costs could weigh on the profitability. Moreover, given the stressed operating environment and ongoing litigation issues, we do not expect any significant improvement in earnings in the coming quarters.

Deutsche Bank currently carries a Zacks Rank #3 (Hold).

Competitive Landscape

The Royal Bank of Scotland Group plc RBS reported second-quarter 2015 earnings attributable to shareholders of £293 million ($448.6 million) compared with £230 million ($387.3 million) in the prior-year comparable period. Results were driven by profit from discontinued operations, reflecting an upswing in the market value of Citizens’ shares and elevated impairment releases. However, higher restructuring, litigation and conduct costs and reduced non-interest income was on the downside.

Other foreign banks that are expected to release results in the coming days include Itau Unibanco Holding S.A. ITUB and Mitsubishi UFJ Financial Group, Inc. MTU. Mitsubishi UFJ is scheduled to report June quarter-end results on Jul 31, while Itau Unibanco will report on Aug 4.

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