Deutsche Bank (DB) Misses Q2 Earnings On Low Revenue

Deutsche Bank AG (DE:DBKGn) (NYSE:DB) reported net income of €20 million ($22.6 million) in the second quarter of 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), down 66.8% year over year.

Lower revenues and higher provisions negatively impacted the results. However, the reduction in non-interest expenses was a positive factor.

Weak Revenues & Higher Provisions Recorded, Costs Fall

The bank reported net revenue of €7.4 billion ($8.4 billion) in the second quarter, down 19.6% year over year. The decline can be attributed to the challenging market environment, global economy concerns including the Brexit, persistent low interest rate environment in Europe and the implementation of strategic decisions.

Revenues at the Global Markets (GM) division plunged 28% from the prior-year quarter to €2.4 billion ($2.7 billion). The decrease came on the back of implementation of strategic decisions, a challenging trading environment and reduced client activity.

Revenues at the Corporate & Investment Banking (CIB) division plunged 12% from the prior-year quarter to €1.9 billion ($2.1 billion). Weak market conditions in Corporate Finance mainly led to the fall, partially mitigated by stable transaction banking revenues.

The Private, Wealth & Commercial Clients (PW&CC) segment’s revenues totaled €1.9 billion ($2.1 billion), down 11% year over year. Revenues were affected by the non-recurrence of equity pick-ups from the bank’s stake in Hua Xia Bank. Excluding such effect, weak revenues exhibited challenging market conditions and persistent low interest rates.

At the PostBank unit, revenues of €903 million ($1.02 billion) increased 13% from the year-ago figure. Prevailing low interest rate environment impacted revenues from savings and current accounts which were partially offset by new Loan business in Mortgages and Consumer Finance. Moreover, the significant improvement in other net revenues driven by a gain on the sale of a stake in Visa Europe Limited was another positive.

The Deutsche Asset Management (Deutsche AM) segment posted revenues of €706 million ($797.2 million), down 8% year over year. Excluding the Abbey Life gross-up, revenues were down 17% year over year.

Non-Core Operations Unit (NCOU) recorded negative revenues of €349 million ($394.1 million) that reflected a significant year-over-year decrease of €572 million. The decline reflected net losses from de-risking.

The provision for credit losses increased 71.5% from the year-ago quarter to €259 million ($292.5 million).

Non-interest expenses of €6.7 billion ($7.6 billion) were down 14.1% from the year-ago quarter. Non-interest expenses included reduced litigation charges while elevated restructuring and severance costs.

Deutsche Bank’s Common Equity Tier 1 (CET1) capital ratio (pro-forma Capital Requirements Regulation (CRR)/Capital Requirements Directive 4 (CRD 4) fully loaded) stood at 10.8% as of Jun 30, 2016, compared with 11.4% as of Jun 30, 2015. Leverage ratio, on an adjusted fully loaded basis, was 3.4% as of Jun 30, 2016, down from 3.6% in the prior-year quarter. Risk-weighted assets amounted to €402 billion ($445.5 billion) as of Jun 30, 2016, compared with €416 billion ($461.5 billion) as of Jun 30, 2015.

Our Viewpoint

Cryan, who succeeded co-CEO Anshu Jain last June, inherited the task of executing the bank’s “Strategy 2020,” which comprises several measures including initiatives to reposition Investment Banking, reorganize retail business and reduce the geographic presence. Deutsche Bank shocked markets last October after it announced plans of retrenching nearly 35,000 employees as part of its restructuring plan.

Though the new CEO of Deutsche Bank appears to be proactive, it is really difficult to determine how much the bank will gain under his leadership, considering the prevailing headwinds. Though Strategy 2020 efforts are encouraging and we expect the initiative to help improve the company’s operating efficiency, as the European economy is yet to stabilize, we don’t foresee any significant favorable change in the company's performance in the near term.

Deutsche Bank currently carries a Zacks Rank #5 (Strong Sell).

Other foreign banks that are expected to release results soon include The Royal Bank of Scotland (LON:RBS) Group plc (TO:RBS) , Itau Unibanco Holding S.A. (NYSE:ITUB) and UBS Group AG (NYSE:UBS) . Royal Bank of Scotland is scheduled to report on Aug 5, UBS on Jul 29, while Itau Unibanco is slated to report quarterly results on Aug 2.

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