Why Is Deutsche Bank (DB) Up 5.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Deutsche Bank (DB). Shares have added about 5.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Deutsche Bank due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Deutsche Bank Q1 Earnings and Revenues Increase Y/Y

Deutsche Bank’s first-quarter 2021 net income of €1.04 billion ($1.25 billion) rose substantially from the year-ago quarter’s €66 million. Also, the German lender reported profit before taxes of €1.59 billion ($1.91 billion) compared with $206 million in the year-ago quarter.

First-quarter results benefited from higher net revenues and a decline in expenses. Also, strong capital position was a tailwind. Further, a decline in provision for credit losses was a positive factor.

Revenues Rise, Costs & Provisions Decline

The bank generated net revenues of €7.23 billion ($8.71 billion) in the first quarter, up 14% year over year. The upside was primarily due to higher revenues from investment bank and asset management units.

Provision for credit losses was €69 million ($83.17 million), down 86% from $506 million reported in the year-ago quarter.

Non-interest expenses of €5.57 billion ($6.71 billion) were down 1% from the prior-year quarter due to lower restructuring expenses. Excluding transformation-related charges, the bank reported adjusted costs of €4.7 billion ($5.66 billion), down 4%.

Segmental Performance

Net revenues at the Corporate Bank division of €1.31 billion ($1.58 billion) declined 1% from the year-ago quarter. Lower revenues in institutional client services led to the downside.

Investment Bank’s net revenues totaled €3.1 billion ($3.74 billion), up 32% year over year. Higher revenues from fixed income, particularly debt origination business, along with rise in origination and advisory, resulted in the jump.

Private Bank reported net revenues of €2.18 billion ($2.63 billion), almost stable year over year. Higher revenues from Private Bank Germany were offset by International Private Bank revenues.

Asset Management generated net revenues of €637 million ($767.78 million), up 23% year over year, mainly due to a favorable change in the fair value of guarantees and higher performance fees. Net asset inflows during the quarter were €1 billion ($1.2 billion).

Corporate & Other reported negative net revenues of €74 million ($89.19 million) against net revenues of €43 million a year ago.

Capital Release reported net revenues of €81 million ($97.63 million) compared with negative net revenues of €57 million a year ago, reflecting the impact of hedging costs, funding charges and de-risking costs.

Capital Position

Deutsche Bank’s Common Equity Tier 1 capital ratio (fully loaded) came in at 13.7% as of Mar 31, 2021, up from 12.8% in the year-ago quarter. Leverage ratio, on an adjusted fully-loaded basis, was 4.6%, up from 4%.

Risk-weighted assets increased €1 billion in the first quarter to €330 billion ($397.75 billion) sequentially.

Outlook 2021

Group and Core Bank revenues are expected to be essentially flat year over year as continued headwinds from the low interest rate environment and impacts of the pandemic are expected to be offset by strategic initiatives implemented to enable sustainable revenue growth.

Corporate Bank revenues are expected to be essentially flat year over year as Deutsche Bank’s strategic growth initiatives and benefits from the European Central Bank’s Targeted Long-Term Refinancing Operation (TLTRO) III program might offset the impacts of the pandemic and the challenging interest rate environment.

The company expects Investment Bank revenues to remain flat year over year.

Private Bank net revenues are expected to remain flat with continued headwinds from the low-rate environment offset by business growth, selected re-pricing measures and benefits from the ECB’s TLTRO III program.

Revenues in Asset Management are expected to be higher compared to 2020. Management fees are likely to be higher year over year as it expects positive impacts from both net inflows and favorable market developments to more than offset fee compression.

The Capital Release Unit is expected to report negative revenues due to de-risking impacts, funding costs, hedging costs and mark-to-market impacts. This will be partially offset by positive revenues related to the reimbursement of Prime Finance operating costs and a modest income from loan portfolios.

Corporate & Other segment will continue to be affected by valuation and timing differences on positions that are economically hedged but do not meet the accounting requirements for hedge accounting. The unit will also be hurt by certain transitional costs relating principally to changes in internal funds transfer pricing framework, which are expected to be around €250 million in 2021.

Deutsche Bank aims to further reduce adjusted costs mainly from the run-rate impact of measures already in place as well as execution of further reductions principally in Infrastructure functions and Private Bank. It plans incremental investments of approximately €300 million in 2021, principally in German IT integration. The company expects transformation-related effects of about €1 billion in 2021.

Management expects provisions for credit losses to be significantly lower in 2021 from the previous year as a result of an improved economic outlook and continued tight risk management.

CET 1 ratio is expected to remain above 12.5%.

Medium-Term Target (2022-end)

For the group, post-tax return on tangible equity (RoTE) of 8% is targeted by 2022, given external headwinds, including interest-rate movements in the euro area. Notably, various measures have been implemented by the bank to nullify the impact of lower interest rates to a greater extent. Loan growth, passing through negative interest rates, further optimization of liquidity reserves and using deposit tiering arrangements initiated by the European Central Bank advantageously are some of the measures.

For the Core Bank, excluding the Capital Release Unit, Deutsche Bank anticipates post-tax RoTE target of above 9% in 2022. Cost income ratio of 70% is expected.

By 2022, the company expects to a build a revenues base of €24.4 billion. Revenues from Private Bank are projected to reach €8.3 billion at a CAGR of 2% in two years (ended 2022), while that from Corporate Bank is likely to hit €5.5 billion at a CAGR of 4% over the same period. Investment Bank’s revenues are expected to climb to €8.5 billion at a CAGR of 7% over a period of four years (2019-2022). Asset Management revenues are also expected to increase by 2022.

The company aims to reduce adjusted costs to €16.7 billion by 2022.

Provision for credit losses is expected to be about €1.2 billion.

CET 1 capital ratio is anticipated to be maintained at 12.5%. Also, leverage ratio is likely to be about 4.5%.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

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