Deutsche Bank Posts Better-Than-Expected Q4 Results; Warns Of Higher Legal Costs In 2015

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Deutsche Bank (NYSE:DB) gave investors a welcome surprise on Thursday, January 29, by reporting a net profit for the fourth quarter of the year thanks to a better-than-expected performance by its trading desks. [1] The largest German bank was expected to record a legal charge of €772 million ($875 million) for the quarter to cover ongoing settlement talks. [2] But the bank increased legal provisions by a much lower €207 million ($235 million), and the bottom line also gained from a one-time tax benefit of €189 million ($210 million) – keeping the Q4 results out of the red. Notably, Deutsche Bank ended up with a loss in Q4 2013 as well as Q3 2014, and the bank cautioned investors of large legal charges over subsequent quarters as it remains embroiled in several high-profile lawsuits and regulatory probes.

Things were not all bad for Deutsche Bank, though, as its asset management arm continued its strong run, and the bank’s efforts to shrink its non-core operations unit (NCOU) helped the size of assets under this division fall to below €40 billion ($45 billion) from €64 billion ($72 billion) at the end of 2013. Q4 2014 was also one of the best quarters for Deutsche Bank since the economic downturn of 2008 in terms of M&A advisory, as revenues from these services roped in €188 million ($210 million).

While we recognize the downside that the existing legal burden presents for Deutsche Bank’s results in the near future, we believe that the long term benefits from the bank’s continued focus on strengthening its balance sheet and cutting costs as a part of Strategy 2015+ outweighs the short term performance issues the bank is currently facing. That is why we maintain a $37 price estimate for Deutsche Bank’s stock, which is almost 30% ahead of the current market price.

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Trading Operations Lift 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 more than 55% of its total value (sales and trading, and advisory and underwriting services put together) according to our estimates. Revenues for the bank’s Corporate Banking and Securities business unit were just under €3 billion ($3.4 billion) for the quarter – 5% below the figure for the previous quarter but a good 20% better than that for the year-ago period. Notably, Deutsche Bank’s trading operations fared much better than those of its U.S.-based peers, who reported considerable reductions in revenues year-on-year as well quarter-on-quarter. Debt trading operations suffering in particular for the quarter from a marked increase in volatility over the month of December. While Deutsche Bank was also subject to the negative impact of higher volatility, we believe that favorable exchange rate movements played an important role in helping the bank buck the industry trend.

Total trading revenues for the quarter was slightly below €1.9 billion ($2.1 billion), with debt trading operations responsible for just over 60% of the figure and the equity trading desk contributing the rest. Although the fourth quarter of a year is generally the slowest period for the seasonal trading industry, Deutsche Bank did well to report equity trading revenues that were identical to the figure for the previous quarter and a strong 35% higher than that for Q4 2013.

One-Time Gain Helps Asset Management Division Post Record Results

Deutsche Bank’s asset and wealth management business surpassed the record performance it posted in Q3 2014 to churn out a pre-tax income of €365 million ($410 million) for the quarter. Although the figure benefited from a one-time accounting gain of €83 million ($94 million), the division’s revenues from management fees and other recurring sources was at the highest level since the economic downturn of 2008. The division witnessed a net inflow of cash for the fourth consecutive quarter, helping assets under management scale record highs after crossing the €1-trillion ($1.28 trillion) mark last quarter.

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Notes:
  1. Deutsche Bank reports fourth quarter 2014 net income of EUR 441 million, Deutsche Bank Press Releases, Jan 29 2015 []
  2. Deutsche Bank swings back with €441m profit in fourth quarter, Financial Times, Jan 29 2015 []