Strong Investment Banking, Asset Management Performance Helps Deutsche Bank Overcome Legal Charges In Q2
Deutsche Bank (NYSE:DB) reported better-than-expected results for a second consecutive quarter on Thursday, July 30, thanks to another solid run by the investment banking arm and a record performance by the asset management division. ((Interim Report 2Q2015, Deutsche Bank Investor News, July 30 2015)) This strong performance helped the German banking giant overcome a €1.2 billion legal charge over its legacy U.S. mortgage-related lawsuit to report its best second quarter results since Q2 2011. The fact that loan provisions fell to just €151 million ($165 million) in Q2 – the lowest for any quarter since Q2 2008 – also benefited the bottom line.
While investors were happy about the results for the quarter, their confidence in Deutsche Bank’s future was reaffirmed by CEO John Cryan’s commitment to focus on four key areas in the near future: reducing costs, clearing the legal backlog, shoring up the balance sheet and improving shareholder returns. [1] Cryan also expressed his support to the long term reorganization plan, Strategy 2020, announced by his predecessors in April (see A Detailed Look At Deutsche Bank’s New Reorganization Plan ‘Strategy 2020’).
We maintain a $38 price estimate for Deutsche Bank’s stock, which is about 10% ahead of the current market price.
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Trading Revenues Remain High, While Origination Gains Swell
The importance of Deutsche Bank’s investment banking division to its business model is demonstrated by the chart above, which shows that the business accounts for 54% 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 €4.3 billion ($4.7 billion) for the quarter – 7% below the figure for the previous quarter but a good 23% higher than that for the year-ago period.
This is a commendable performance given the fact that the seasonal investment banking industry sees the highest level of activity in the first quarter, and also because the bank’s largest revenue stream – debt trading – was hurt in Q2 from weak activity levels over May and June. Deutsche Bank’s FICC (fixed-income, currencies and commodities) trading operations did well to generate €2.1 billion ($2.3 billion) in revenues this quarter – down from €2.6 billion in the previous quarter, but better than the €1.8 billion reported last year. The equities trading desk also did its part with revenues of just under €1 billion for the quarter, which represents a small decline quarter-on-quarter. Revenues also received a boost from solid equity and debt origination fees for the quarter. While equity origination deals roped in €265 million in revenues, debt origination revenues reached an all-time high of €456 million.
Asset and Wealth Management Division Also Has Solid Quarter
Deutsche Bank’s asset and wealth management business reported its best performance ever in Q2 2015, with the division churning out a pre-tax income of €422 million ($460 million). This is 45% higher than the profits for the previous quarter and a 107% jump year-on-year. In fact, this figure is also 18% higher than the previous best pre-tax income figure of €368 million seen in Q3 2014 – when the top line benefited from a one-time accounting gain.
The division benefited this time around from favorable exchange rate movements, which helped boost interest as well as fee-based revenue figures. Despite strong inflows, the negative impact of market valuations dragged down the total size of assets under management (AUM) for the Deutsche Asset and Wealth Management (DeAWM) division from the record €1.16 trillion figure at the end of Q2 2015 to below €1.14 trillion. At the same time, expenses remained under control – allowing the bank to achieve a cost-to-income ratio of 70% this quarter compared to 79% in the previous quarter and 83% in the year-ago period. In fact, this was the lowest cost-to-income figure for the division since at least 2005.
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- Deutsche Bank reports second quarter 2015 net income of EUR 818 million, Deutsche Bank Press Releases, July 31 2015 [↩]