Deutsche Bank (NYSE:DB) ended up with a pre-tax loss of €351 million ($460 million) for the fourth quarter of 2011, bringing to an end a difficult year for the German bank. [1] Interestingly, the company managed to avoid reporting a net loss for the period with income tax benefits coming to its rescue. Although analysts had forecast soft numbers from the bank as the quarter was plagued by fears of European debt issues spreading, the reported results were worse than anticipated while competitors Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) were able to beat expectations. With Deutsche Bank contemplating the sale of its stable asset management business, its volatile investment banking operations could become even more important to is business model.
We reiterate our $49 price estimate for Deutsche Bank’s stock, and believe that the 10% premium over current market prices can be attributed to the pessimistic sentiment among investors toward banks in the wake of Europe’s debt situation.
See our full analysis for Deutsche Bank
Deutsche Bank Couldn’t Have Done Much About Its Investment Banking Business
Deutsche Bank’s numbers were no doubt weak. But one cannot forget the fact that the German bank has a substantial exposure to the peripheral European nations which have been hit worst by the debt crisis. The results lend support to one fact this is a tough time to be a European investment bank.
Deutsche Bank’s investment banking operations continued the bad run which began in Q3 2011. Volatile market conditions that were prevalent in the second half of 2011 were hardly conducive to trading activities. The slowdown also dried up demand for advisory services, with companies across the globe putting off capital raising or restructuring plans.
One look at the quarterly income statement shows what went wrong – sales & trading activities, which normally bring in between €2.5 billion to €3 billion ($3.3 billion to $3.9 billion) in quarterly revenues for the bank, ended up only bringing in about €1.6 billion ($2.1 billion) for Q4 2011.
According to our estimates, sales & trading contributes to almost a third of Deutsche Bank’s value, and the volatility associated with this business will always be a cause for concern.
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Notes:- Deutsche Bank reported net income of EUR 4.3 billion for the full year 2011, Deutsche Bank Press Releases, Feb 2 2012 [↩]
