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Deutsche Bank Might Report Third Consecutive Loss in 2017

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Deutsche Bank AG (DB - Free Report) will likely report annual loss consecutively for the third year, as its results are expected to be impacted by change in tax rates and poor performance of the investment banking segment. High legal expenses during the final quarter of 2017 also played a role in wiping out profit.

CEO John Cryan of the Germany-based lender has been trying to turnaround the bank through cost-saving measures and focus on investment banking. However, unfavorable trading environment and persistent legal matters affected his plans and has put him on the verge of dismissal.

Impact of Tax Reform

Deutsche Bank expects the drop in tax rate to negatively impact its financials by €1.5 billion due to revaluation of deferred tax assets. Further, the bank expects the tax overhaul to weaken its capital position. Common Equity Tier 1 ratio is anticipated to fall by 10 basis points.

Per the bank, reduction in tax rates will likelylead to a fall in its effective tax rate to the lower end of the previously expected range of 30-35%.

Slump in Trading Activities

The investment banking segment suffered from low volatility and weak client activity during the fourth quarter due to which the bank expects fixed income, equity and financing revenues to fall 22% from the prior-year period.

Endless Legal Matters

The bank’s struggle with legal matters continues to impact its bottom line. For the fourth quarter, Deutsche Bank expects a €0.5 billion hit from legal proceedings.  

During the quarter, it was fined by the U.S. District Court for having rigged foreign exchange rates. Moreover, in late December, shareholders sued the bank for €740 million for allegedly paying former Postbank shareholders lower than that was agreed.

Our Viewpoint

Even though Deutsche Bank’s restructuring efforts are encouraging, it is really difficult to determine to what extent they will support the results, considering the prevailing headwinds. Further, poor performance of the investment banking segment has increased pressure on Cryan to show some improvement in the bank’s condition.  

Shares of Deutsche Bank have lost 2.6% in a year’s time versus 21.7% growth of the industry it belongs to.

Stocks to Consider

Some stocks worth considering in the same space are Credit Suisse , HDFC Bank Limited (HDB - Free Report) and The Bank of N.T. Butterfield & Son Limited (NTB - Free Report) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Credit Suisse’s Zacks Consensus Estimate for earnings for 2017 has remained stable, in the last 30 days.

HDFC’s 2017 earnings estimates have been revised nearly 1% upward, over the last 30 days.

Bank of N.T. Butterfield & Son’sZacks Consensus Estimate for 2017 earnings was revised slightly upward, over the last 30 days.

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