Will Legal Issues Impact Deutsche Bank (DB) Q4 Earnings? - Analyst Blog
Deutsche Bank AG (DB) is scheduled to report its fourth-quarter 2014 results on Thursday, Jan 29.
In the last quarter, this foreign bank delivered disappointing results with a net loss, due to non-tax deductibility of certain litigation charges. However, lower provision for credit losses and higher revenues were the positives, partially offset by increase in non-interest expenses.
Will Deutsche Bank impress in the upcoming release after combating the challenges the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.
Factors to Influence Q4 Results
Repositioning of business fundamentals to withstand any further crisis remains the trend of non-U.S. banks in the quarter. Though defensive actions like limiting expenses are still in place and focus on non-interest income is increasing, margin compression and sluggish loan growth would act as the major dampeners.
Capital efficiency is the key to survival, and most foreign banks are adopting reconstruction-by-asset-sale strategies to strengthen capital ratios. While this will make their business safer, growth prospects are unimpressive with lessening sources of income.
Further, a prolonged low interest rate environment is not expected to reverse any time soon as central banks of most of the countries will continue to prioritize growth over inflation control. This strategy is sustainable as inflation is the concern of only a few emerging economies. Thus, banks operating in a low interest rate environment will not be able boost revenues through interest income.
The full implementation of the Basel III standards -- the risk-proof capital standard agreed upon by regulators across the world -- is due in 2018. Though some non-U.S. banks have already started complying with the requirements, many have yet to make headway.
Amid several litigation issues and internal inefficiencies, Deutsche Bank is striving hard through restructuring initiatives that focus on building capital levels to achieve operational efficiency and reduce risk-weighted assets (RWAs).
What Management Expects?
In its Strategy 2015+, Deutsche Bank declared a number of initiatives to boost its competitiveness. These include improvement in efficiency, aggressive cost cuts, a simplified capital structure and a change in the company’s compensation policies. The new compensation program directs payment of bonuses to the chief executives after a period of five years, instead of the former partial bonus payment after every three years.
Management expects adjusted post-tax return on average active equity of 12% in 2015 and 2016. Adjusted cost to Income ratio is expected to be 65% for 2015 and 2016. Further, cost savings are anticipated to be €4.5 billion by 2015 and thereafter, while cost to achieve savings is expected at €4 billion. CRR/CRD 4 fully loaded Common Equity Tier 1 ratio is projected above 10% in both 2015 and 2016, while fully loaded CRR/CRD 4 Leverage Ratio is estimated at 3.5%.
Other foreign banks that are expected to release results in the coming days include Itau Unibanco Holding S.A. (ITUB), Mitsubishi UFJ Financial Group, Inc. (MTU) and The Royal Bank of Scotland Group plc (RBS). Itau Unibanco and Mitsubishi UFJ will report December quarter-end results on Feb 3, while Royal Bank of Scotland is scheduled to report on Feb 26.
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