Litigation Charges Mar Deutsche Bank’s Q2 Performance Figures

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Increased regulatory and legal pressure made an already bad operating performance by Deutsche Bank (NYSE:DB) over the second quarter of the year look worse, as the German banking giant saw its pre-tax income shrink to less than €800 million ($1.05 billion) for the period from €2.4 billion ($3.2 billion) for the previous quarter and almost €1 billion ($1.3 billion) for the same quarter last year. [1] The underlying performance was rather lukewarm with only the Private & Business Clients division generating more revenues sequentially and operating expenses seeing an increase due to additional restructuring costs incurred across business divisions. The income statement also included a €630 million ($840 million) charge from an increase in litigation-related provisions – increasing the size of Deutsche Bank’s current litigation reserves to €3 billion ($4 billion).

The bank also announced plans to shrink its balance sheet by €250 billion ($332 billion) – a good 13% of the €1.9 trillion ($2.5 trillion) in assets currently on the balance sheet. The required effort will cost Deutsche Bank €600 million ($800 million) in one-time expenses over coming quarters, and the bank will also forego a pre-tax income of €300 million ($400 million) in the process.

We believe that the long-term benefits from the proposed strengthening in the bank’s balance sheet outweighs the short-term performance issues the bank is currently facing, and stick to our $54 price estimate for Deutsche Bank’s stock.

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See our full analysis for Deutsche Bank

Investment Banking Operations Witnessed Some Highs And Some Lows

Deutsche Bank’s investment banking business generated about 45% of the bank’s total revenues for the quarter with the equities trading desk putting up one of its best quarterly performances over the recent years with revenues of €787 million ($1 billion). The fixed-income business, on the other hand, visibly shows the impact of growing interest rate uncertainty seen towards the end of the quarter as it came up with one of the lowest revenue figures over the last two years.

The bank also reported a good 35% sequential jump in its equity origination revenues, as the strong equity markets worldwide allowed it to garner a bigger share in Europe this time around. Equity origination fees of €204 million ($271 million) were the highest for Deutsche Bank since Q2 2011.

Private & Business Clients Division Also Puts Up A Good Show

Deutsche Bank’s private & business clients division which houses its consumer banking business in Germany as well as its advisory banking business across the world saw its pre-tax income cross €500 million ($665 million) for the first time since Q1 2011 this quarter, with improved revenues and lower non-interest expenses helping the bank’s cause. While the size of total invested assets shrunk compared to the previous quarter, this is largely due to the reduced valuation of assets from the swoon witnessed in global debt markets towards the end of the quarter.

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Notes:
  1. Deutsche Bank reports second quarter 2013 income before income taxes of EUR 792 million, Deutsche Bank Press Releases, Jul 30 2013 []