Deutsche Bank’s Reorganization Plan Will Continue To Put Pressure On Revenues

by Trefis Team
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Deutsche Bank (NYSE:DB) reported its results for the second quarter of 2018 recently – giving investors a more detailed look into the ad-hoc earnings preview it posted previously. We have summarized Deutsche Bank’s Q2 2018 earnings and also detailed our expectations for the rest of the year in our interactive dashboard for the company, the key parts of which are captured further below.

While the German banking giant did well to report a larger-than-expected profit for the quarter, there were some unfavorable trends linked to the bank’s ongoing reorganization plan. Key among them is the fact that Deutsche Bank’s decision to slash its U.S. rates trading desk is going to meaningfully weigh on revenues in the long run. The bank reported its worst second quarter FICC trading revenues since the economic downturn this time around, even as its U.S. peers made the most of increased capital market volatility to report year-on-year gains of 5-10% in these revenues. Taken together with the sizable cuts in the equity trading business, Deutsche Bank’s core securities trading revenue stream is expected to largely remain around Q2 levels going forward.

Accordingly, the success of Deutsche Bank’s reorganization plan will rest on how well it can cut costs over the next few quarters. Unless the bank makes up for the lower revenues by reducing costs at a faster rate, the latest reorganization plan will join the long list of other plans over the last few years which the bank had trouble executing successfully.

That said, we expect Deutsche Bank to gain in the near future from improving conditions in Europe (especially from a potential hike in interest rates in the region) while it consolidates its retail banking operations in Germany with the ongoing integration of Postbank. Also, with a fully-loaded common equity Tier 1 (CET1) capital ratio figure of 13.7% at the end of Q2 2018, Deutsche bank has a significant capital buffer that should benefit investors in terms of dividends or share repurchases. Taking all this into account, we maintain a price estimate of $15 for Deutsche Bank’s stock, while acknowledging the downside risk that exists if the bank’s reorganization plan is not as fruitful as expected. The price estimate is about 25% ahead of the current market price.

See our full analysis for Deutsche Bank

Investment Banking Operations Still Key To Deutsche Bank’s Profits

Deutsche Bank’s reorganization plan aims to implement sizable cuts to its securities trading operations. Despite this, these operations are expected to remain the cornerstone of the bank’s business model, with the bank’s long-term growth ambitions built around being the largest market-maker for securities in Europe. This is also evident from the fact that the proposed cuts target the U.S. rates trading business while focusing on European clients and the prime brokerage business.

Deutsche Bank’s securities trading revenues and advisory & underwriting fees for the quarter totaled nearly €2.5 billion – almost 38% of the bank’s total revenues. As we pointed out earlier, this is well below the €2.8 billion in these revenues a year ago – primarily due to lower FICC trading revenues. Going forward, investment banking revenues are unlikely to exceed 50% of total revenues as seen in the past – more likely remaining around the 40% mark.

Asset Management Unit Likely To Remain Under Pressure

While Deutsche Bank’s personal and commercial banking division is likely to benefit from improving market conditions in the near future, the asset management arm is expected to see depressed revenues from the ongoing trend of a steady outflow of cash. The division saw €5 billion in investor fund outflows over the second quarter of 2018 – adding to the €8 billion in outflows for the first quarter. Despite the outflows, the assets under management increased sequentially to €692 billion from a low of €678 billion at the end of Q1 2018 thanks to improved asset valuations.

While industry-wide headwinds are partially responsible for this, a series of bad news around Deutsche Bank over recent months also contributed to the outflows. This kept asset management revenues depressed for a second consecutive quarter.

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