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Deutsche Bank (DB) Up 8.1% Since Last Earnings Report: Can It Continue?
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A month has gone by since the last earnings report for Deutsche Bank (DB - Free Report) . Shares have added about 8.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Deutsche Bank due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Deutsche Bank Q2 Earnings Rise Y/Y on Higher Revenues
Deutsche Bank reported second-quarter 2020 net income of €61 million ($67.1 million) as against the year-ago quarter’s net loss of €3.1 billion. Also, the German lender reported adjusted profit before taxes of €935 million ($1 billion), up 44.7% year over year.
Second-quarter results benefitted from higher net revenues and a decline in expenses. Also, strong capital position was a tailwind. However, a drastic increase in provision for credit losses due to the impacts of the coronavirus outbreak was a major offsetting factor.
Revenues Rise Slightly, Provisions Flare Up
The bank generated net revenues of €6.29 billion ($6.9 billion), up 1% year over year. The upside was primarily due to higher revenues from investment bank.
Provision for credit losses rose substantially to €761 million ($837.1 million) from $161 million in the year-ago quarter.
Non-interest expenses of €5.37 billion ($5.9 billion) were down 23% from the prior-year quarter. Excluding restructuring-related charges, the bank reported adjusted costs of €4.9 billion ($5.4 billion), down 8% year over year.
Segmental Performance
Net revenues at the Corporate Bank division of €1.33 billion ($1.5 billion) rose 3% from the year-ago quarter. Higher revenues in global transaction banking led to the rise.
Investment Bank segment’s net revenues totaled €2.7 billion ($3 billion), up 46% year over year. Higher revenues from fixed income, particularly debt origination business, along with rise in origination and advisory resulted in the rise.
Private Bank reported net revenues of €2.16 billion ($2.4 billion), down 5% year over year. The fall primarily stemmed from the impact of COVID-19 and ongoing deposit margin compression, which offset the positive impact of continued growth in volumes.
Asset Management segment generated net revenues of €549 million ($603.9 million), down 8% year over year mainly due to the non-recurrence of periodic performance fees relating to an infrastructure fund in the prior-year quarter.
Corporate & Other unit reported negative net revenues of €154 million ($169.4 million) against net revenues of €184 million a year ago.
Capital Release unit reported negative net revenues of €70 million ($77 million) against net revenues of €221 million, reflecting businesses exited or discontinued and the impact of de-risking costs.
Capital Position
Deutsche Bank’s Common Equity Tier 1 capital ratio (fully loaded) came in at 13.3% as of Jun 30, 2020, compared with 13.4% in the year-ago quarter. Leverage ratio, on an adjusted fully-loaded basis, was 4.2%, up year over year from 3.9%.
Risk-weighted assets decreased €10 billion in the June-end quarter to €331 billion ($371.6 billion) sequentially.
Outlook for 2020
The company expects post-tax return on average tangible shareholders’ equity in 2020 to be negatively affected by costs to execute its strategy as well as the impact of the COVID-19 outbreak on the broader economic environment.
Revenues for the company are expected to be essentially flat in 2020 mainly as a result of continued de-risking activities in the Capital Release Unit. Core Bank revenues are expected to be slightly higher in 2020 than the previous year based on the strong revenue performance in the first half of the year combined with expectations of a gradual recovery of the global economy in the second half of 2020. In addition, Deutsche Bank expects revenues to continue to be impacted from the ongoing low interest rate environment. Although volatility has receded, macroeconomic and market conditions are expected to remain volatile for the remainder of 2020, with substantial uncertainty as to the short and longer-term impacts of the COVID-19 pandemic. It seeks to offset some of these negative impacts through ongoing investment into growth areas.
Provision for credit losses is expected to significantly increase in 2020 due to a continued normalization of provisioning levels, lower recoveries and the impact of the COVID-19 outbreak on Expected Credit Loss estimates. It reaffirmed guidance for provision for credit losses of between 35 and 45 basis points of loans in 2020.
The lender remains on track to deliver adjusted costs of €19.5 billion in 2020. Transformation-related costs of €1.4 billion are expected to be incurred in 2020.
Deutsche Bank expects the litigation and enforcement environment to remain challenging in the short term. For 2020, it expects net litigation charges to exceed the levels experienced in 2019.
Management believes that significant opportunities exist to support clients, which may lead to a temporary increase in risk-weighted assets (RWA). As a result, it expects RWA to be slightly higher in 2020 compared to the prior year.
Post-tax Return on Average Tangible Shareholders’ Equity is expected to be affected by costs related to the execution of its strategy as well as the impact of COVID-19 on the broader economic environment.
Medium-Term Target (2022-end)
For the group, post-tax return on tangible equity (RoTE) of 8% is targeted by 2022, given external headwinds, including interest-rate movements in the euro area. Notably, various measures have been implemented by the bank to nullify the impact of lower interest rates to a greater extent. Loan growth, passing through negative interest rates, further optimization of liquidity reserves and using deposit tiering arrangements initiated by the European Central Bank advantageously are some of the measures.
For the Core Bank, excluding the Capital Release Unit, Deutsche Bank anticipates post-tax RoTE target of above 9% in 2022. Cost income ratio of 70% is expected.
Per management anticipations, the interest-rate environment is likely to affect the returns in the Private Bank and Corporate Bank in the mid-term, partly offset by revenue growth in the Investment Bank and Corporate & Other.
The company aims to reduce adjusted costs to €17 billion by 2022.
CET 1 capital ratio is anticipated to be maintained at 12.5%. Also, leverage ratio is likely to be about 5%.
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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Deutsche Bank (DB) Up 8.1% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Deutsche Bank (DB - Free Report) . Shares have added about 8.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Deutsche Bank due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Deutsche Bank Q2 Earnings Rise Y/Y on Higher Revenues
Deutsche Bank reported second-quarter 2020 net income of €61 million ($67.1 million) as against the year-ago quarter’s net loss of €3.1 billion. Also, the German lender reported adjusted profit before taxes of €935 million ($1 billion), up 44.7% year over year.
Second-quarter results benefitted from higher net revenues and a decline in expenses. Also, strong capital position was a tailwind. However, a drastic increase in provision for credit losses due to the impacts of the coronavirus outbreak was a major offsetting factor.
Revenues Rise Slightly, Provisions Flare Up
The bank generated net revenues of €6.29 billion ($6.9 billion), up 1% year over year. The upside was primarily due to higher revenues from investment bank.
Provision for credit losses rose substantially to €761 million ($837.1 million) from $161 million in the year-ago quarter.
Non-interest expenses of €5.37 billion ($5.9 billion) were down 23% from the prior-year quarter. Excluding restructuring-related charges, the bank reported adjusted costs of €4.9 billion ($5.4 billion), down 8% year over year.
Segmental Performance
Net revenues at the Corporate Bank division of €1.33 billion ($1.5 billion) rose 3% from the year-ago quarter. Higher revenues in global transaction banking led to the rise.
Investment Bank segment’s net revenues totaled €2.7 billion ($3 billion), up 46% year over year. Higher revenues from fixed income, particularly debt origination business, along with rise in origination and advisory resulted in the rise.
Private Bank reported net revenues of €2.16 billion ($2.4 billion), down 5% year over year. The fall primarily stemmed from the impact of COVID-19 and ongoing deposit margin compression, which offset the positive impact of continued growth in volumes.
Asset Management segment generated net revenues of €549 million ($603.9 million), down 8% year over year mainly due to the non-recurrence of periodic performance fees relating to an infrastructure fund in the prior-year quarter.
Corporate & Other unit reported negative net revenues of €154 million ($169.4 million) against net revenues of €184 million a year ago.
Capital Release unit reported negative net revenues of €70 million ($77 million) against net revenues of €221 million, reflecting businesses exited or discontinued and the impact of de-risking costs.
Capital Position
Deutsche Bank’s Common Equity Tier 1 capital ratio (fully loaded) came in at 13.3% as of Jun 30, 2020, compared with 13.4% in the year-ago quarter. Leverage ratio, on an adjusted fully-loaded basis, was 4.2%, up year over year from 3.9%.
Risk-weighted assets decreased €10 billion in the June-end quarter to €331 billion ($371.6 billion) sequentially.
Outlook for 2020
The company expects post-tax return on average tangible shareholders’ equity in 2020 to be negatively affected by costs to execute its strategy as well as the impact of the COVID-19 outbreak on the broader economic environment.
Revenues for the company are expected to be essentially flat in 2020 mainly as a result of continued de-risking activities in the Capital Release Unit. Core Bank revenues are expected to be slightly higher in 2020 than the previous year based on the strong revenue performance in the first half of the year combined with expectations of a gradual recovery of the global economy in the second half of 2020. In addition, Deutsche Bank expects revenues to continue to be impacted from the ongoing low interest rate environment. Although volatility has receded, macroeconomic and market conditions are expected to remain volatile for the remainder of 2020, with substantial uncertainty as to the short and longer-term impacts of the COVID-19 pandemic. It seeks to offset some of these negative impacts through ongoing investment into growth areas.
Provision for credit losses is expected to significantly increase in 2020 due to a continued normalization of provisioning levels, lower recoveries and the impact of the COVID-19 outbreak on Expected Credit Loss estimates. It reaffirmed guidance for provision for credit losses of between 35 and 45 basis points of loans in 2020.
The lender remains on track to deliver adjusted costs of €19.5 billion in 2020. Transformation-related costs of €1.4 billion are expected to be incurred in 2020.
Deutsche Bank expects the litigation and enforcement environment to remain challenging in the short term. For 2020, it expects net litigation charges to exceed the levels experienced in 2019.
Management believes that significant opportunities exist to support clients, which may lead to a temporary increase in risk-weighted assets (RWA). As a result, it expects RWA to be slightly higher in 2020 compared to the prior year.
Post-tax Return on Average Tangible Shareholders’ Equity is expected to be affected by costs related to the execution of its strategy as well as the impact of COVID-19 on the broader economic environment.
Medium-Term Target (2022-end)
For the group, post-tax return on tangible equity (RoTE) of 8% is targeted by 2022, given external headwinds, including interest-rate movements in the euro area. Notably, various measures have been implemented by the bank to nullify the impact of lower interest rates to a greater extent. Loan growth, passing through negative interest rates, further optimization of liquidity reserves and using deposit tiering arrangements initiated by the European Central Bank advantageously are some of the measures.
For the Core Bank, excluding the Capital Release Unit, Deutsche Bank anticipates post-tax RoTE target of above 9% in 2022. Cost income ratio of 70% is expected.
Per management anticipations, the interest-rate environment is likely to affect the returns in the Private Bank and Corporate Bank in the mid-term, partly offset by revenue growth in the Investment Bank and Corporate & Other.
The company aims to reduce adjusted costs to €17 billion by 2022.
CET 1 capital ratio is anticipated to be maintained at 12.5%. Also, leverage ratio is likely to be about 5%.
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.