Deutsche Bank (DB) Up 14.9% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Deutsche Bank (DB). Shares have added about 14.9% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Deutsche Bank Q1 Earnings Fall Y/Y, Expenses Decline

Deutsche Bank reported first-quarter 2020 net income of €66 million ($72.8 million) compared with the year-ago quarter’s €201 million. However, the German lender reported adjusted profit before taxes of €303 million ($334.3 million), up 13% year over year.

Drastic increase in provision for credit losses due to the impacts of the coronavirus outbreak was a major offsetting factor. Also, revenues remained stable on a year-over-year basis. Decline in expenses came as a tailwind.

Revenues Remain Stable, Provisions Flare Up

The bank generated net revenues of €6.35 billion ($7 billion), stable year over year.

Provision for credit losses was €506 million ($558.3 million) compared with $140 million in the year-ago quarter.

Non-interest expenses of €5.64 billion ($6.22 billion) were down 5% from the prior-year quarter. Excluding restructuring-related charges, the bank reported adjusted costs of €5.5 billion ($6.07 billion), down 7%.

Segmental Performance

Net revenues at the Corporate Bank division of €1.33 billion ($1.47 billion) declined 1% from the year-ago quarter. Lower revenues in global transaction banking led to the fall.

Investment Bank segment’s net revenues totaled €2.34 billion ($2.58 billion), up 18% year over year. Higher revenues from fixed income, particularly debt origination business, along with rise in origination and advisory resulted in the rise.

Private Bank reported net revenues of €2.16 billion ($2.38 billion), up 2% year over year. The rise primarily stemmed from higher revenues from international businesses and wealth management unit.

Asset Management segment generated net revenues of €519 million ($572.7 million), down 1% year over year mainly due to the negative change in fair value of guarantees, mainly driven by lower interest rates.

Corporate & Other unit reported net revenues of €63 million ($70 million) against negative net revenues of €16 million a year ago.

Capital Release unit reported negative net revenues of €59 million ($65.1 million) against net revenues of €387 million. Funding and credit valuation adjustments and de-risking costs were partly offset by hedging and risk management gains, and income from the BNP Paribas agreement.

Capital Position

Deutsche Bank’s Common Equity Tier 1 capital ratio (fully loaded) came in at 12.8% as of Mar 31, 2020, compared with 13.7% in the year-ago quarter. Leverage ratio, on an adjusted fully-loaded basis, was 4%, up from 3.9%.
Risk-weighted assets increased €17 billion in the March-end quarter to €341 billion ($376.3 billion) sequentially.

Outlook for 2020

The company expects post-tax return on average tangible shareholders’ equity in 2020 to be affected by costs to execute its strategy as well as the impact of the COVID-19 outbreak on the broader economic environment.

Revenues are expected to be slightly lower in 2020, mainly as a result of continued de-risking activities in the Capital Release Unit. Core Bank revenues are expected to be essentially flat in 2020 compared to the previous year. Lowered expectations reflect the likely impact on certain businesses by the recent market dislocations as a result of the COVID-19 outbreak at the end of the first quarter, which has continued into the second quarter, as well as the adverse impacts of the ongoing low interest rate environment.

Provision for credit losses is expected to significantly increase in 2020 due to a continued normalization of provisioning levels, lower recoveries and the impact of the COVID-19 outbreak on Expected Credit Loss estimates. The company expects majority of the provisions to be taken in the first half of 2020, with normalization later in the year.

The lender remains on track to deliver adjusted costs of €19.5 billion in 2020. Transformation-related costs of €1.4 billion are expected to be incurred in 2020.

Also, due to the challenging environment, the bank temporarily suspended its 2020 CET1 capital target of at least 12.5% and leverage ratio target of 4.5%.

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.

Per management anticipations, the interest-rate environment is likely to affect the returns in the Private Bank and Corporate Bank in the mid-term, partly offset by revenue growth in the Investment Bank and Corporate & Other.

The company aims to reduce adjusted costs to €17 billion by 2022.

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