Deutsche Bank's Earnings Fall

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Deutsche Bank AG (DB), Germany’s largest lender, reported earnings per share of €0.32 in the second quarter of 2013, down from €0.68 earned in the year-ago quarter.

Net income came in at €335 million ($437 million), down 50% from €666 million ($856 million) in the prior-year quarter.

Deutsche Bank’s quarterly performance came on the back of enhanced revenues and a strong capital position. However, these were partially offset by increased expenses as well as higher provision for credit losses.

Quarter in Detail

Deutsche Bank reported net revenue of €8.2 billion ($10.7 billion), up 2% year over year. The improvement was mainly attributable to increased revenues in Corporate Banking & Securities (CB&S), Global Transaction Banking (:GTB), Asset & Wealth Management (:AWM) and Private & Business Clients (:PBC) segments.  However, these positives were partly offset by a decline in revenues in both the Consolidation & Adjustments (C&A) unit and the Non-Core Operations Unit (:NCOU).

Improved market sentiment in Sales & Trading (equity) as well as strong issuance activity in Origination and Advisory partly offset by reduced revenues in Sales & Trading (debt and other products), pulled up the CB&S revenues 9% from the prior-year quarter to €3.7 billion ($4.8 billion).

At Deutsche Bank’s GTB business, solid business volumes countered the persistent pressure on interest margin as well as a challenging economic environment, and led to a 1% year-over-year rise in revenues to €994 million ($1,298 million).

Moreover, the AWM segment posted a year-over-year revenue rise of 6% to €1.0 billion ($1.3 billion), attributable to increased assets under management (:AUM) base and higher client activity levels.

Additionally, the PBC segment’s revenues were €2.4 billion ($3.1 billion), rising 6% from the prior-year quarter. The increase was driven by improved market conditions and positive one-off effects in the other products category.

However, revenues in the NCOU decreased by 53% year over year to €193 million ($252 million), reflecting reduced asset base due to the de-risking activities of the bank.

Consolidation & Adjustments (C&A) net revenue declined from negative €55 million ($72 million) in the second quarter of 2012 to negative €167 million, mainly due to the non-recurrence of positive effects from interest on taxes recorded in the reported quarter.

The provision for credit losses increased 12% from the year-ago period to €473 million ($618 million), driven by higher provisions in both the NCOU as well as by the Core Bank.

However, non-interest expenses of €6.9 billion ($9.0 billion) were up 5% from the year-ago period, driven by increased litigation related expenses that were partly offset by lower expenses related to the ongoing implementation of the Operational Excellence Program (OpEx) expense saving program, and lower compensation and benefits expenses as well. Non-interest expenses from restructuring activities related to OpEx were €192 million in the said quarter.

Deutsche Bank’s core Tier 1 capital ratio came in at 13.3% at the quarter-end up from 12.1% at the end of the prior quarter. The rise was attributable to the company’s €3.0 billion common shares issuance. As of Jun 30, 2013, the bank’s Basel 3 core Tier 1 ratio came in at 10.0%, up from the company’s estimate of 8.5%.

Risk-weighted assets fell to €314 billion ($410 billion) from €325 billion ($424 billion) at the prior quarter-end, mainly due to successful execution of the risk reduction program in the NCOU and model roll outs. Total assets declined 6% to €1.9 trillion ($2.5 trillion) at the end of the reported quarter.

Strategic Efforts

In its Strategy 2015+, Deutsche Bank declared a number of initiatives aimed at increasing its competitiveness. These include efficiency improvements, cost cuts and reduced complexity. Further, the company altered the compensation practices of the management. The new policy deemed the payment of bonuses to the company’s chief executives after 5 years, instead of the previous practice of part payment over a span of 3 years.

The company contemplates making investments of approximately €4 billion and other such measures to help achieve full run-rate annual cost savings of €4.5 billion by 2015. The initial phase of this revamping initiative was implemented in the third quarter of 2012.

Further, Deutsche Bank aims to reduce its risk-weighted assets. Its de-risking measures are also on track. The company achieved asset reduction of €10.6 billion ($13.8 billion) of in the reported quarter. Further, owing to the bank’s strong operating performance and disciplined asset reduction, its Basel 3 Common Equity Tier 1 capital ratio was 10.0%, a target which was achieved earlier than expected.  

Our Viewpoint

Deutsche Bank’s strategic initiatives, including the repositioning of its core business and bolstering of its capital levels augur well for its growth. However, the costs related to it cannot be ignored.

Due to the eurozone debt crisis, Deutsche Bank experienced a fall in trading revenues in the past. Amid the stressed operating environment, lower returns and stringent capital norms, the company is rightsizing its business through job cuts and various restructuring initiatives.

Moreover, owing to macroeconomic uncertainty and the cautious approach of management, we believe that Deutsche Bank will find it difficult to report earnings growth in the upcoming quarters.

Deutsche Bank currently carries a Zacks Rank #5 (Strong Sell). Some other foreign banks worth considering include BBVA Banco Franc (BFR), Mitsubishi UFJ Financial Group, Inc. (MTU) and Sumitomo Mitsui Financial Group Inc. (SMFG). All these stocks carry a Zacks Rank #1 (Strong Buy).
 

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