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Deutsche Bank (DB) Q3 Earnings Improve, Revenues Down

Deutsche Bank AG DB reported net income of €649 million ($762.6 million) in third-quarter 2017, significantly up on a year-over-year basis. Income before income taxes grew 50.7% year over year to €933 million ($1.1 billion).

Cost management and reduction in provisions were positive factors. However, lower revenues due to trading slump were an undermining factor. Notably, net new money inflows were recorded during the quarter.

Recently, the German bank agreed to a $220-million settlement over manipulation of the U.S. Dollar, LIBOR (the London Interbank Offered Rate) and other benchmark interest rates.

Weak Revenues & Low Provisions Recorded, Costs Down

The bank reported net revenues of €6.8 billion ($8 billion) in the third quarter, down 10% year over year. Low client activity levels and interest rates, along with subdued volatility, during the quarter led to the downside.

Revenues at the Corporate & Investment Banking (CIB) division of €3.5 billion ($4.1 billion) declined 23% compared with the year-ago quarter, on soft client activity and subdued volatility. Lower Equity Sales & Trading and Origination and Advisory revenues along with reduced revenues in Global Transaction Banking (GTB) led to the fall. Moreover, reduction in Fixed Income & Currencies (FIC) revenues was also recorded.

The Private & Commercial Bank (PCB) segment’s revenues totaled €2.6 billion ($3.1 billion), up 3% year over year. One-time gain from the sale of shares in Concardis GmbH led to the rise.

The Deutsche Asset Management (Deutsche AM) segment generated revenues of €628 million ($737.9 million), stable year over year. Results reflect a one-time item associated with a real-estate fund, mitigated by non-recurring Abbey Life revenues, and reduced performance and transaction fees. Net new money inflows for the quarter were €4 billion ($4.7 billion).

Notably, progress of the partial IPO of Deutsche Asset Management is on track and expected to commence within the next two years.

The provision for credit losses plummeted 43.7% from the year-ago quarter to €184 million ($216.2 million). The decline resulted from upbeat performance in the Corporate & Investment Bank and strong credit quality in the Private & Commercial Bank.

Non-interest expenses of €5.7 billion ($6.7 billion) were down 14% from the prior-year quarter. Non-interest expenses included reduced restructuring and impairment costs. In addition to this, reduced professional services fees and the closure of the Non-Core Operations Unit (NCOU), lower litigation costs and cost-management initiatives by the bank led to the decline.

Deutsche Bank’s Common Equity Tier 1 (CET1) capital ratio (pro-forma Capital Requirements Regulation (CRR)/Capital Requirements Directive 4 (CRD 4) fully loaded) came in at 13.8% as of Sep 30, 2017, compared with 11.1% recorded as of Sep 30, 2016. Leverage ratio, on an adjusted fully-loaded basis, was 3.8% as of Sep 30, 2017, up from 3.5% in the prior-year quarter. Risk-weighted assets amounted to €355 billion ($418.9 billion) as of Sep 30, 2017, down 7.8% year over year.

Other Developments

Recently, Deutsche Bank and Postbank announced realignment of their business with private and commercial clients, in which over 20 million clients and 325 billion euros in client business volume will create a single entity. By the end of second-quarter 2018, a single legal entity will be formed after the completion of the merger, but would maintain two different brands.

Post integration, considerable synergies will be reaped, including €900 million annually, by 2022. Notably, €1.9 billion will be spent in restructuring expenses and other investments, mainly in technology. Additionally, the cost-income ratio for this business is anticipated to be lowered to below 65% by 2022.

Our Viewpoint

Deutsche Bank reported a decent quarter with prudent cost-control initiatives. To resist another financial meltdown, banks in Europe are under stringent regulatory pressure to maintain a sturdy capital position. Following the capital raise last quarter, Deutsche Bank is focused on its series of additional actions and new financial targets, replacing the ones announced in October 2015.

Furthermore, if the planned investment reaps benefits, the excess capital in the future shall be returned to shareholders, in turn, boosting their confidence.

Though Deutsche Bank’s restructuring efforts look encouraging, it is really difficult to determine how much the bank will gain, considering the lingering headwinds. Moreover, poor revenue performance remains another concern.
 

Deutsche Bank currently carries a Zacks Rank #5 (Strong Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other foreign banks, Mitsubishi UFJ Financial Group, Inc. MTU, Itau Unibanco Holding S.A. ITUB and The Royal Bank of Scotland Group plc RBS are scheduled to report results on Nov 14, Oct 30 and Oct 27, respectively.

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