Deutsche Bank Posts Dismal Q1 Earnings - Analyst Blog

Impacted by a disappointing top-line performance, Deutsche Bank AG DB reported net income of €1.1 billion ($1.5 billion) in the first quarter of 2014, down from €1.7 billion ($2.2 million) in the prior-year quarter. However, decreased expenses, lower provision for credit losses and a strong capital position were the positives.

The bank reported net revenue of €8.4 billion ($11.5 billion) in the reported quarter, down 11% year over year. The decline was mainly attributable to decreased revenues in Corporate Banking & Securities (CB&S), Deutsche Asset & Wealth Management (DeAWM), Non-Core Operations Unit (NCOU) and Global Transaction Banking (GTB).  However, these negatives were partly offset by an improvement in revenue in the Private & Business Clients (PBC) unit.

Quarterly Segments' Performance:

CB&S revenues were down 10% from the prior-year quarter to €4.1 billion ($5.6 billion). The decrease stemmed from lower revenues in Sales & Trading, which resulted from reduced client activity reflecting low volatility and continuing uncertainty around emerging markets. Additionally, losses from Debt Valuation Adjustment DVA led to the decline.

At Deutsche Bank's GTB business, revenues of €1.0 billion ($1.4 billion) were down 1% year over year. The decrease was driven by a highly competitive environment and continued low interest rates.

The DeAWM segment posted a year-over-year revenue fall of 14% to €1.1 billion ($1.5 billion), attributable to mark-to-market movements on positions of policyholder in Abbey Life.

NCOU recorded revenues of €74 million ($101.4 million), down 83% year over year, mainly due to a reduction of assets following the de-risking activities undertaken by the bank.

Additionally, Consolidation & Adjustments (C&A) net revenue deteriorated from negative €259 million ($342.1 million) in the prior-year quarter to negative €327 million ($448.1 million) in the reported quarter.

However, the PBC segment's revenues were €2.5 billion ($3.4 billion), up 4% from the prior-year quarter. The upsurge was mainly driven by consequent gains associated with a business sale closed in the prior period and higher revenues in investment and insurance products.

The provision for credit losses descended 30% from the year-ago period to €246 million ($337.1 million). This decrease was primarily driven by lower provisions in CB&S, GTB and NCOU units.

Non-interest expenses of €6.5 billion ($8.9 billion) were down 2% from the year-ago period. This resulted from decreased compensation and benefits expenses and reduced policyholder benefits and claims. Notably, non-interest expenses included cost-to-achieve related to OpEx of €310 million ($424.8 million) 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) was 9.5% as of Mar 31, 2014, up from 8.8% as of Mar 31, 2013. Leverage ratio, on an adjusted fully loaded basis, was 3.2% as of Mar 31, 2014. Risk-weighted assets decreased 1.8% year over year to €373 billion ($511.1 billion) as of Mar 31, 2014.

Strategic Efforts

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 five years, instead of the former partial payment over a span of three years.

The company contemplates making investments of approximately €4 billion and undertaking other such measures to help achieve full run-rate annual cost savings of €4.5 billion by 2015. These strategies were, on the whole initiated in the third quarter of 2012. Notably, at the end of first-quarter 2014, Deutsche Bank invested €2.1 billion and achieved incremental savings of €2.3 billion.

Further, Deutsche Bank aims to reduce its risk-weighted assets and continue with its de-risking measures.

Our Viewpoint

Amid the worldwide economic volatility and the continuing Eurozone crisis, the company is focused on building its capital level. Strategy 2015+ efforts are encouraging and we expect such efforts to help improve its operating efficiency. However, the related costs could weigh on the profitability. Moreover, given the stressed operating environment, we do not expect any significant improvement in earnings in the coming quarters.  

Deutsche Bank currently carries a Zacks Rank #3 (Hold). Other better-ranked foreign banks include Banco Macro S.A. BMA, Grupo Financiero Galicia S.A. GGAL and ICICI Bank Ltd. IBN. All these 3 carry a Zacks Rank #1 (Strong Buy).