How Much Will Macroeconomic Uncertainty Weigh On Deutsche Bank’s Q1?

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Trefis
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DB
Deutsche Bank

Deutsche Bank (NYSE:DB) is set to announce its Q1 2019 results on April 26, followed by a conference call with analysts. Consensus estimates call for the bank to report revenue of close to €6.3 billion in Q1 2019, which would be a decline of nearly 10% on a year-on-year basis, as rising geopolitical risks, slowing economic momentum, receding global central bank liquidity, and gently rising interest rates are likely to adversely impact the bank’s revenues across operating divisions. Market expectations call for the bank to report earnings of €0.10 per share in Q1 2019, higher than €0.06 per share in the year-ago period. Earnings plunged from Q3 into Q4 and we forecast a modest increase in earnings in the coming quarter.

We have summarized our key expectations from the earnings announcement in our interactive dashboard – What Has Driven Deutsche Bank’s Revenues & Expenses Over Recent Quarters, And What Can We Expect For Full-Year 2019? In addition, here is more Trefis Financial Services Data.

Key Factors To Watch For In Q1

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Cost Cutting Measures To Continue

  • DB has been extremely successful in reducing its costs over the years, with non-interest expense falling from €38.6 billion in 2015 to €23.5 billion in 2018 (CAGR: -15.3%). This can be primarily attributed to the bank’s rigorous cost management, which has helped the bank to reduce its non-compensation expense by more than 50% during the same period.
  • DB was able to reduce its adjusted costs by €1.1 billion in 2018 and remains on track to further reduce its adjusted costs by €1 billion in 2019.

Debt Origination Business Is Likely To Rebound

  • Debt Origination fees form an important part of DB’s investment banking business- constituting ~ 10% of IB revenues.
  • Management stated that the Debt Origination business has started 2019 well, and they have a good pipeline for conversion in the first quarter.
  • Moreover, according to quarterly data published by Thomson Reuters, overall global debt capital markets activity totaled $1.8 trillion during the first quarter of 2019, with first quarter issuance increasing by 48% compared to the fourth quarter of 2018.
  • Taking all this into account, we expect modest sequential growth in Debt Origination Fees in Q1, but a y-o-y decline.

Uncertain Macroeconomic Environment

  • Uncertainty around the escalation of trade disputes resulting in higher tariffs and Brexit uncertainty, in addition to other macro uncertainty, continued to impact the global economy, leading to reduced client activity and poor investor sentiment.
  • Political risks also remain elevated, adversely impacting business investment and economic activity, and this is likely to weigh on the bank’s profitability.
  • Moreover, continuation of the low interest rate environment in European countries is negatively impacting the bank’s net interest income, which constituted more than 50% of the bank’s total revenues in 2018.

Trefis Price Estimate

We expect Deutsche Bank’s adjusted EPS for full-year 2019 to be around €0.71. Using this figure with our estimated forward P/E ratio of 11, this works out to a price estimate of $9 for Deutsche Bank’s shares (assuming a EUR-USD exchange rate of 1.15).

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