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Weak Euro Hurts Deutsche Bank

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Hurt by a weakening Euro, Deutsche Bank AG (DB) has warned of discouraging second quarter results. The company, which is scheduled to report its complete result on July 31, has come up with a preliminary update on its second quarter results yesterday.

Currently, Deutsche Bank projects its net income for the quarter to be €700 million ($845 million), down from €1.2 billion in the prior-year quarter. Its pre-tax profit is estimated to be around €1.0 billion, substantially down from €1.8 billion earned in the prior-year quarter.

Deutsche Bank’s earnings figure is based on second quarter total revenues of €8.0 billion that came below the prior period level of €8.5 billion. Notably, a weak Euro which has adversely impacted its U.S. dollar and pound sterling cost base resulted in non-interest expense of €6.6 billion, ahead of the prior year period’s €6.3 billion. The company set aside €400 million for credit provisions, slightly below the year-ago quarter level of €464 million.

Even in the midst of such circumstances, Deutsche Bank confirmed its simulated, pro forma, Basel III fully phased-in Core Tier 1 capital ratio of 7.2% at the beginning of 2013. It will scale back its risk-weighted assets to mitigate the impact from lower earnings. The company’s core Tier 1 capital ratio was 10.2% at the end of the second quarter, up from 10.0% at the end of the prior quarter.

Our Take

Deutsche Bank has adopted several strategic initiatives including the repositioning of its core business and bolstering of its capital levels. While such initiatives augur well, costs associated with such efforts cannot be denied.

Hurt by the Euro-zone debt crisis, Deutsche Bank experienced trading revenue declines in the past. Besides a drop in revenues, in the second quarter, the weak Euro has added to its woes. As a matter of fact, Deutsche Bank is also facing scrutiny for its alleged participation in interest rate manipulation, including Libor.

Given the stressed operating environment, we believe that any significant improvement in its earnings in the upcoming quarters would remain elusive. We now look forward to the next week, when UBS AG (UBS) is also scheduled to release its earnings results on July 31.

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