Deutsche Bank’s Dismal Q4 Likely A One-Off, Results Should Improve In 2018

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Deutsche Bank

A much-weaker-than expected performance by Deutsche Bank (NYSE:DB) over the last quarter of 2017, coupled with the bank’s admission that it will not be able to meet its cost-cutting target for 2018, triggered a sell-off in the German banking giant’s shares late last week – resulting in an 8.4% decline in the share price on Friday, February 2. While Deutsche Bank’s continued struggle to remain profitable even as it works through its backlog of legacy legal issues is a cause for concern in the long run, we believe that investors overreacted to the bad news.

It should be noted that Q4 2017 was a particularly bad period for the global securities trading industry – with all banking giants reporting a slump in these revenues by roughly 20% year-on-year – and this business forms a major chunk of Deutsche Bank’s business model. At the same time, Deutsche Bank’s top line was hurt by a weakening U.S. Dollar period, as its trading revenues in the U.S. were marked down in its reporting currency (Euro).

We maintain a price estimate of $18 for Deutsche Bank’s stock, which is slightly ahead the current market price. We have created an Interactive Summary of Deutsche Bank’s Q4 as well as its key drivers for 2018. You can modify our assumptions to see the impact those changes would have on the bank’s results.

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Key Reasons For The Sell-Off

  • Sharp reduction in total revenues: Notably, revenues for Q4 2017 were the lowest reported by Deutsche Bank for any quarter since 2010. Additionally, revenues for full-year 2017 were markedly lower for each of the bank’s reported segments compared to the figures for 2016

  • Operating costs yet to be reined in: Deutsche Bank announced bonus payouts to employees this year after cancelling bonuses in 2016. The move makes sense considering the fact that the bank wants to ensure that key employees do not get poached by competitors, but it also led to a sharp increase in total expenses for an already poor quarter operationally. Taken together with the fact that a delay in the planned disposal of non-core assets hurt its cost-reduction target for 2018, this highlights the bank’s struggle to keep costs in check

What To Look Forward To In 2018

  • Recovery in securities trading revenues: The unusually low volatility in global capital markets seen over the second half of 2017 is not expected to recur in 2018. There was a noticeable increase in market volatility last week, and we expect this trend to continue over most of 2018 – helping Deutsche Bank’s fixed income as well as equity trading revenues

  • Lower effective tax rate: An important factor behind Deutsche Bank’s huge loss in Q4 2017 was the one-time accounting charge of ~ 1.4 billion euros incurred by the bank as it wrote off deferred tax assets after the U.S. tax reform was implemented. Deutsche Bank generates more than a quarter of its revenues from the U.S., so the lower corporate tax rate should have an overall positive impact on the bank’s tax rate over coming years.

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