Deutsche Bank Reports Lukewarm Q1 Results As Trading Revenues Shrink

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Deutsche Bank (NYSE:DB) reported better-than-expected performance figures for the first quarter of the year early this Tuesday thanks to a revenue beat by its trading unit. [1] The largest German bank was among the first global banking giants to signal lower trading revenues for Q1 – a trend witnessed throughout the banking sector, as debt market activity was depressed due to investor concerns about the Fed tapering its asset purchase program too soon, fears of a slowdown in Germany and China as well as the crisis in Ukraine. However, the bank’s reported trading revenues of €3.2 billion (~$4.5 billion) were well above estimates for the quarter.

Deutsche Bank’s top-line figures fell nearly 11% compared to the €9.4 billion (~$13 billion) figure for the first quarter of 2013, primarily due to three factors: a 7.5% reduction in net interest income, an 8% decline in sales & trading revenues and a 83% fall in revenues for its non-core operations unit. But the bank was able to mitigate the impact on the bottom line by cutting non-interest expenses to under €6.5 billion (~$9 billion) for the first time since Q3 2011. Fortunately, Deutsche Bank did not have to contend with multi-billion dollar legal settlements this time around – unlike the previous quarter when these charges pushed results into the red.

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Deutsche Bank also announced plans to issue loss-absorbing capital worth €1.5 billion (~$2 billion) – its first step towards bridging an approximate €5-billion (~$7 billion) shortfall in its Tier 1 capital eligible under Basel III norms. [2] We maintain our $52 price estimate for Deutsche Bank’s stock, which is about 20% ahead of the current market price, while acknowledging the downside that exists from a potential stock issuance by the bank in the near future to shore up its balance sheet.

See our full analysis for Deutsche Bank

Investment Banking Operations Continue To Have Mixed Results

The importance of Deutsche Bank’s investment banking business to its business model is demonstrated by the chart above, which shows that the business accounts for almost 60% of its total value (sales & trading and advisory & underwriting services put together) according to our estimates. The operations generated a little less than €4.1 billion (~$5.6 billion) in revenues for the first quarter – 10% lower than the €4.5 billion (~$6.2 billion) it made in the year-ago period but a good 63% above the dismal €2.5 billion (~$3.5 billion) figure for Q4 2013. It should be noted, however, that investment banking revenues are typically highest in the first quarter.

Deutsche Bank’s equities trading desk made €772 million (~$1.1 billion) in revenues this quarter – in line with Q1 2013, and 43% higher than the figure for Q4 2013. On the other hand, debt trading revenues saw a 10% decline year-on-year and origination revenues were also 14% lower between the periods.

Expense Management, Disposal Of Non-Core Assets Key To Future Profitability

Deutsche Bank’s organization-wide restructuring plan, dubbed Strategy 2015+, focuses considerably on cutting costs. The plan, which was unveiled in late 2012, sought to cut as much as €4.5 billion ($6.1 billion) in recurring costs by the end of 2015 and bring down the banking group’s cost-to-income ratio to under 65% (see Deutsche Bank Set For Complete Shake-up As Part Of ‘Strategy 2015+’). Eighteen months into it, things are looking good on the cost front, as operating expenses of €6.5 billion (~$9 billion) for the quarter were the lowest in the last 10 quarters. In terms of cost-to-income ratios, there has also been a notable improvement, as this metric was 77% for Q1 2014 – among the best in recent years.

Disposal of non-core assets housed under the group’s Non-Core Operations Units (NCOU) plays an important role in this cost-cutting plan. Late last month, the bank completed the sale of BHK-Bank in a move that took it one step closer to winding down its NCOU division. [3]

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Notes:
  1. Deutsche Bank reports first quarter 2014 income before income taxes of EUR 1.7 billion, Deutsche Bank Press Releases, Apr 29 2014 []
  2. Deutsche Bank undertakes issuance of Additional Tier 1 capital, Deutsche Bank Press Releases, Apr 28 2014 []
  3. Deutsche Bank completes sale of BHF-BANK, Deutsche Bank Press Releases, Mar 27 2014 []