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Why Is Deutsche Bank (DB) Down 14% Since Last Earnings Report?

A month has gone by since the last earnings report for Deutsche Bank (DB). Shares have lost about 14% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Deutsche Bank due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Deutsche Q1 Earnings Improve Y/Y on Lower Expenses

Deutsche Bank reported net income of €201 million ($228.3 million) in first-quarter 2019, up 67% from €120 million in the year-ago quarter. The bank reported profit before taxes of €292 million ($331.6 million).

First-quarter results benefited from net asset inflows and prudent expense management. Also, strong capital position remains a tailwind. However, lower revenues and higher provisions were the key undermining factors.

Lower Costs Offset Fall in Revenues & Higher Provisions

The bank generated net revenues of €6.4 billion ($7.3billion) in the first quarter, down 9% year over year. Lower revenues across all the segments, primarily due to implementation of strategic measures and a challenging market environment, led to this downside.

Revenues at the Corporate & Investment Banking division of €3.3 billion ($3.7 billion) declined 13% from the year-ago quarter. Lower revenues in Sales & Trading (Fixed Income and Equity) along with Origination & Advisory revenues led to the fall.

The Private & Commercial Bank (“PCB”) segment’s revenues totaled €2.5 billion ($2.9 billion), down 5% year over year. Lower revenues from business in and outside Germany resulted in the decline.

The Asset Management segment generated revenues of €525 million ($596 million), down 4% year over year, mainly due to lower management fees. Notably, the company reported net asset inflows of €10 billion during the quarter.

Provision for credit losses increased 60% from the year-ago quarter to €140 million ($159 million). The rise resulted largely from higher provisions in the PCB unit.

Non-interest expenses of €5.9 billion ($6.7 billion) were down 8% from the prior-year quarter. The decline resulted from the bank’s successful implementation of cost savings initiatives.

Deutsche Bank’s Common Equity Tier 1 (CET1) capital ratio (pro-forma Capital Requirements Regulation/Capital Requirements Directive 4 fully loaded) came in at 13.7% as of Mar 31, 2019, compared with 13.4% as of Mar 31, 2018. Leverage ratio, on an adjusted fully-loaded basis, was 3.9%, up from 3.7% in the prior-year quarter. Risk-weighted assets declined €3 billion in the March-end quarter.

Outlook for 2019

The company expects 40 basis points (bps) impact on its CET1 ratio on account of regulatory headwinds. About 20 bps of this decline will occur in the second quarter based upon recent asset quality feedback from the ECB. Also, a further 20 bps impact is expected within the next 2 quarters.

Effective tax rate of approximately 35% is expected in 2019.

In 2019, Deutsche Bank intends to build on the progress made in 2018 to achieve near-term operating targets for adjusted costs and employees. Meeting its 2019 target of 4% post-tax return on tangible equity depends on factors within direct control, but also on factors, which are more market-sensitive and-event sensitive.

The company expects revenues for 2019 to be essentially flat year over year. The aim is to improve revenues, in particular through investments in targeted growth areas including loan and volume growth as well as through liquidity and balance sheet optimization and redeployment. The expectations also takes into account that market environment and client activity in the first quarter of 2019 were not supportive of an impressive revenue recovery in more market sensitive businesses.

For the Group, the bank is committed to reducing adjusted costs in 2019 to €21.8 billion and to reducing internal workforce to below 90,000 full-time employees. It expects to benefit from the run-rate impact of measures executed in 2018, as well as from the impact of Postbank integration and from the exit of retail business in Portugal, and it will continue to address structural cost issues and optimize processes while also striving for additional cost savings if the revenue environment does not develop.

Segment Outlook

Corporate & Investment Bank revenues for 2019 are expected to be slightly higher compared to 2018, on account of improvements in macroeconomic and financial market environment.

In Private & Commercial Bank, the company expects growth in investment and loan businesses in 2019. In the investment businesses, it plans to grow net new assets, and to continue hiring relationship managers in core markets and expects to be able to leverage pricing opportunities in a normalizing market environment. In the loan businesses, it targets to further accelerate growth in 2019 within existing risk management framework and with focus on consumer and commercial loans. Margin pressure on deposit products is likely to continue in the ongoing low interest rate environment. Also, decline in revenue base is expected as a result of business divestitures in Poland and Portugal. Given these aforementioned opposing revenue trends, PCB revenues are to remain essentially flat in 2019.

For Asset Management, AUM is expected to increase at the end of 2019. Net flows are expected to be positive across all major asset classes driven by passive and alternative investments. Also, AM revenues are likely to be essentially flat for 2019 year over year.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.


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