Deutsche Bank Piles On One-Time Charges To Report $3 Billion Loss

A single glance at the Q4 earnings figures for Deutsche Bank (NYSE:DB) shows how much investors underestimated the negative impact of the proposed organization-wide changes on the bank’s results for the quarter. ^[1] While investors expected a modest loss for the period based on preliminary info provided by the largest German bank in mid-December (see Deutsche Bank Separates Non-Core Operations And Will Take Charges In Q4), the reported €2.2 billion ($2.9 billion) loss sure comes as a surprise.

But all things taken together, the numbers tell a positive story with operational performance across divisions showing signs of improvement. In our opinion, that is a good enough reason to overlook the reported loss which stems largely from a €1.9 billion ($2.6 billion) goodwill impairment charge besides €1 billion ($1.4 billion) in litigation-related costs (which we suspect is more of a big bath charge although it can be justified as being linked to Deutsche Bank’s settlement with authorities in the ongoing LIBOR scandal investigation). That said, what really caught our eye in Deutsche Bank’s performance figures is the marked reduction in operating expenses for the investment banking division besides the better-than-expected Core Tier 1 capital ratio in Basel 3 terms.

We are in the process of updating our price estimate for Deutsche Bank’s stock, to fully include the expected impact of Strategy 2015+ on each of Deutsche Bank’s operating divisions over coming years.

More specifically the change is a result of:

• Increase in the estimated margins for the investment banking business from 35% at the end of our forecast period to nearly 39%
• Improved margin estimates for the Global Transaction Banking business over the forecast period
• Faster growth in equity and debt trading assets over the years to come as a direct impact of the recently announced relaxation in Basel 3 capital requirement norms
• Quicker growth in the rate at which the bank returns capital to shareholders through dividend or share repurchase plans – a logical next step once the bank finds itself doing better than expected in meeting capital requirement milestones

See our full analysis for Deutsche Bank

Investment Bank Margin Improvements Outweigh Lukewarm Trading Performance

Deutsche Bank reported an improvement in fees generated by its advisory as well as its debt and equity origination businesses for the quarter with these functions adding €701 million ($950 million) to the top line. This represents the best quarterly performance since Q2 2011 and reinforces Deutsche Bank’s improving presence in the global M&A and underwriting markets. At the same time, sales & trading operations lost some steam, adding just over €1.9 billion ($2.6 billion) for the quarter compared to the €3.8 billion ($5.2 billion) in Q1 2012 and €2.5 billion ($3.4 billion) in Q3 2012. The decline is less drastic on removing the impact of the debt revaluation accounting charge which was negative in Q4.

But the most important factor that worked in favor of Deutsche Bank’s investment banking division in Q4 2012 was the reduction in operating expenses for the period. Compensation and benefit costs were reduced from €1.9 billion ($2.6 billion) in Q1 2012 and €1.5 billion ($2 billion) in Q2 2012 to €1.3 billion ($1.8 billion) in Q4 2012. This focus on cost reduction should do wonders for improving margins (shown in chart below) for the business which contributes to well over half the bank’s total value.

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1. Implementation of new strategy with significant impact on 2012 results, Deutsche Bank Press Releases, Jan 31 2012 [↩]