Strong Trading Performance Lifts Deutsche Bank’s Q2 Results

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Deutsche Bank

Deutsche Bank (NYSE:DB) reported strong performance figures for the second quarter of the year with its securities trading unit outperforming rivals for the second consecutive time. [1] The German bank reported debt trading revenues of €1.8 billion ($2.4 billion) for the period – the same as the year-ago period – even as most of the world’s largest investment banks witnessed a 10-15% decline in these revenues year-on-year. Improved economic conditions also allowed the bank to set aside lower loan provisions for the quarter, helping pre-tax incomes jump 16% over Q2 2013 to reach €917 million ($1.2 billion).

Deutsche Bank faced its share of legal hiccups for the period, though, with the bank revealing that its dark pool trading operations are being investigated by several U.S. regulators. The bank was also forced to hike its legal provisions by €470 million (~$630 million) as its mortgage-related misgivings are expected to result in higher settlement costs in the near future. Notably, there were no such provisions for the first quarter of the year, although litigation expenses for the same period last year were a much higher €630 million (~$840 million). Ignoring one-time hits to the bottom line, the bank demonstrated a balanced performance for an otherwise slow quarter for the banking industry.

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We maintain a $43 price estimate for Deutsche Bank’s stock, which is about 20% ahead of the current market price. We believe that the current share price is considerably depressed as investors remain too cautious about the bank’s legal overhang.

See our full analysis for Deutsche Bank

Investment Banking Operations Carry Results For The Quarter

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 (the Sales and Trading business and Advisory and Underwriting Services put together) according to our estimates. With many investment banks reducing their focus on trading operations to cope with tighter regulatory requirements, and with several of them almost completely doing away with their capital-intensive debt trading desks, Deutsche Bank’s continued push in securities trading seems to be yielding results as it has gained ground over its competitors in each of the last two quarters.

Investment banking operations (reported as Corporate Banking and Securities) generated a little more than €3.5 billion (~$4.7 billion) in revenues for the second quarter – identical to the figure seen in Q2 2013 and 13% lower than the seasonally boosted €4.1 billion (~$5.5 billion) figure for the previous quarter. The debt trading desk brought in 52% of these revenues, followed by the equities trading desk which brought in roughly 20%. The bank also reported revenues of €681 million (~$900 million) from its equity and debt origination services – the highest since the economic downturn of 2008.

Cost Cutting Plan Seems To Be Progressing

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+’). At the end of Q2 2014, the bank has been able to achieve a reduction of €2.6 billion ($3.5 billion) in recurring costs. Also, adjusting costs for litigation- and restructuring-related figures, the cost-to-income ratio stands at a strong 72.1%.

Besides improving cost efficiency, the bank continues to cut down on its non-core assets housed under the Non-Core Operations Units (NCOU) division. The bank followed up the sale of its stake in BHF-Bank earlier this year with the sale of Cosmopolitan of Las Vegas in May (see Deutsche Bank Finally Sells Cosmopolitan For $1.73 Billion) and is now looking for buyers for its Maher Terminals Unit (see Deutsche Bank Plans To Divest Maher Terminals Unit). These three units are the biggest components of the NCOU division, and the bank looks set to finish divesting them by the end of this year.

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Notes:
  1. Interim Report 2Q2014, Deutsche Bank Earnings Releases, Jul 29 2014 []