Deutsche Bank's (DB) Q1 Earnings Impress On Low Provisions

Deutsche Bank AG (DE:DBKGn) (NYSE:DB) reported net income of €575 million ($612.6 million) in first-quarter 2017, significantly up on a year-over-year basis. Income before income taxes came in at €878 million ($935.4 million), up 52% year over year.

Cost management and reduction in provisions were positive factors. However, lower revenues adversely affected results.

Weak Revenues & Low Provisions Recorded, Costs Fall

The bank reported net revenue of €7.3 billion ($7.8 billion) in the first quarter, down 9.9% year over year. The decline is due to the negative impact resulting from reduction in Deutsche Bank’s credit spreads.

Revenues at the Global Markets (GM) division fell 7.1% from the prior-year quarter to €2.6 billion ($2.8 billion). The decrease came mainly on the back of reduced equity sales and trading, partially offset by higher debt sales and trading revenues.

Revenues at the Corporate & Investment Banking (CIB) division of €1.8 billion ($1.9 billion) were almost in line with the year-ago quarter. Higher origination and advisory revenues were offset by lower global transaction banking revenues.

The Private, Wealth & Commercial Clients (PW&CC) segment’s revenues totaled €1.9 billion ($2.0 billion), up 11% year over year.

At the PostBank unit, revenues of €771 million ($821.4 million) decreased 10% from the year-earlier figure. Non-recurrence of a one-off gain in the prior-year quarter, along with negative hedging effects in the reported quarter, primarily led to the decline.

The Deutsche Asset Management (Deutsche AM) segment posted revenues of €607 million ($646.7 million), down 12% year over year. Excluding the Abbey Life gross-up, revenues were down 6% year over year.

The provision for credit losses plummeted 56% from the year-ago quarter to €133 million ($141.7 million). The decline resulted from improved performance in the metals and mining, along with the oil and gas portfolios.

Non-interest expenses of €6.3 billion ($6.7 billion) were down 12% from the year-ago quarter. Non-interest expenses included reduced restructuring and severance costs. Notably, 130 out of the targeted 188 branch closures in Germany have been completed.

Deutsche Bank’s Common Equity Tier 1 (CET1) capital ratio (pro-forma Capital Requirements Regulation (CRR)/Capital Requirements Directive 4 (CRD 4) fully loaded) came in at 11.9% as of Mar 31, 2017, compared with 10.7% as of Mar 31, 2016. Leverage ratio, on an adjusted fully loaded basis, was 3.4% as of Mar 31, 2017, in line with the prior-year quarter. Risk-weighted assets amounted to €358 billion ($384.3 billion) as of Mar 31, 2017, down 10.7% year over year.

Our Viewpoint

Deutsche Bank reported a decent quarter with prudent cost-control initiatives. To resist another financial meltdown, banks in Europe are under stringent regulatory pressure to maintain a sturdy capital position. Therefore, amid macroeconomic headwinds and a challenging operating environment, Deutsche Bank took the capital raising initiative during the quarter and completed the same in early April. Following the capital raise, Deutsche Bank is focused on its series of additional actions and new financial targets, replacing the ones announced in Oct 2015.

Furthermore, if the planned investment reaps benefits, the excess capital in the future would be returned to shareholders, in turn, boosting their confidence.

Though the restructuring efforts of Deutsche Bank appear to be positive, it is really difficult to determine how much the bank will gain, considering the prevailing headwinds.

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

Other foreign banks that are expected to release results soon include Mitsubishi UFJ Financial Group, Inc. (NYSE:MTU) , Itau Unibanco Holding S.A. (NYSE:ITUB) and The Royal Bank of Scotland (LON:RBS) Group plc (TO:RBS) that are scheduled to report results on May 15, May 3 and Apr 28, respectively.

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