Deutsche Bank Takes Europe’s Woes On The Chin

DB: Deutsche Bank logo
Deutsche Bank

Deutsche Bank (NYSE:DB) published detailed performance numbers for the second quarter of the year this Tuesday – a week after presenting a sneak peek to the figures. [1] The largest German bank suffered a double whammy over the period from the deteriorating debt situation in Europe. While the top-line figures took a hit from high volatility in capital markets, the bottom-line was squeezed by a marked increase in operational expenses due to devaluation of the euro in comparison to both the U.S. dollar and the pound sterling. As a result, net revenues were 13% lower than those for Q1 2012 while the net income figure shrunk to less than half over the same period.

We stick to our $49 price estimate for Deutsche Bank’s stock, which is significantly above the current market price. While we recognize the possible impact of the ongoing investigations regarding the bank’s involvement in manipulating the LIBOR, we believe the market is over-reacting to this piece of information (see Deutsche Bank Shares Drop On Reports of LIBOR Investigation).

See our full analysis for Deutsche Bank

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Not An Environment Suitable For Investment Banking Operations

High volatility in debt and equity capital markets around the globe returned to haunt investment banks once again this quarter after eroding profits – and investor sentiments – significantly over the latter half of 2011. Besides making corporates wary of investments the market conditions also forced most of them to delay plans of raising additional capital. This in-turn affected the underwriting business of investment banks too.

The impact on Deutsche Bank’s investment banking operations is evident from the fact that revenues for its Corporate Banking & Securities business fell by 34% compared to those in Q1 2012. The bank’s debt trading business shows the biggest – with revenues reduced to €2.2 billion ($2.7 billion) from €3.4 billion ($4.2 billion) over consecutive quarters. Underwriting revenues also declined by 28% Q-on-Q.

Respite Provided By Transaction Banking Services

Deutsche Bank’s Global Transaction Banking division ended the quarter with record revenues of €972 million ($1.2 billion), marking continued growth in the division’s top-line almost every quarter over the last two year. This quarter, Deutsche Bank extended its transaction banking services into China by being a part of the pilot program that intends to make cross-border yuan transactions easy (see Cross-Border Yuan Payment Opportunities Support $49 Value For Deutsche Bank).

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  1. Deutsche Bank reports second quarter 2012 net income of EUR 661 million, Core Tier 1 ratio of 10.2%, Deutsche Bank Investor News, Jul 31 2012 []