DBSDY DBS Group Holdings Ltd (PK)

Deutsche Bank AG (DB), Germany’s largest lender, returned to profit after reporting a historical loss in the last quarter. Earnings per share came in at €1.71 in the first quarter of 2013, compared with a loss of €2.31 in the prior quarter and earnings of €1.45 in the year-ago quarter.

Net income came in at €1.7 billion ($1.3 billion), up from €1.4 billion ($1.1 million) in the prior-year quarter.

Deutsche Bank’s quarterly performance was driven by enhanced revenues and lower expenses. Strong capital position was also a positive. However, these were partially offset by higher provision for credit losses.

Quarter in Detail

Deutsche Bank reported net revenue of €9.4 billion ($7.1 billion), up 2% year over year. The improvement was mainly attributable to increased revenues in Global Transaction Banking (GTB), Asset & Wealth Management (AWM) and Consolidation & Adjustments (C&A) units, along with substantially improved revenues in the Non-Core Operations Unit (NCOU). However, these positives were partly offset by lower revenues in Corporate Banking & Securities (CB&S) and Private & Business Clients (PBC) segments.

Reduced client activity due to the less favorable macro environment pulled down the CB&S revenues 4% from the prior-year quarter to €4.6 billion ($3.5 billion).

At Deutsche Bank’s GTB business, solid business volumes offset continuous pressure on interest margin, and led to a 3% year-over-year rise in revenues to €992 million ($751 million).

Moreover, the AWM segment posted a year-over-year hike of 8% in revenues to €1.2 billion ($0.9 billion), attributable to increased revenues associated with Abbey Life, which were partly offset by related expenses and increased performance fees.

Additionally, the PBC segment’s revenues were €2.4 billion ($1.8 billion), representing a marginal fall of 1% from the prior-year quarter.

The provision for credit losses increased 13% from the year-ago period to €354 million ($268 million).

However, non-interest expenses of €6.6 billion ($5.0 billion) were down 5% from the year-ago period, driven by disciplined expense management.

Deutsche Bank’s core Tier 1 capital ratio came in at 12.1% at the end of the reported quarter, up from 11.4% at the end of the prior quarter. The rise was attributable to an increase in retained earnings. As of Mar 31, 2013, the bank’s Basel 3 core Tier 1 ratio came in at 8.8%, above the company’s estimate of 8.5%.

Risk-weighted assets moved down to €325 billion ($246 billion) from €334 billion ($253) at the end of the prior quarter, mainly due to a successful execution of the risk reduction program in the NCOU. Total assets scaled up 1% to €2.0 trillion ($1.5 trillion) at the end of the reported quarter.

Strategic Efforts

In its Strategy 2015+, Deutsche Bank declared a number of initiatives aimed at bolstering its competitiveness through efficiency improvements, cost cuts and reduced complexity. Further, the company altered the compensation practices of the top management. The new policies included the chief executives of the company having their bonuses paid after 5 years, instead of the previous practice of part-payment over a span of 3 years.

The company contemplates making investments of approximately €4 billion and other such measures to help achieve full run-rate annual cost savings of €4.5 billion by 2015. The initial phase of this revamping initiative was implemented in the third quarter of 2012.

Further, Deutsche Bank is focused on scaling back its risk-weighted assets. Its de-risking measures are also on track. The company achieved €9 billion ($6.8 billion) of risk-weighted assets equivalent reduction in NCOU in the reported quarter.

Our Take

Deutsche Bank’s strategic initiatives, including the repositioning of its core business and bolstering of its capital levels augur well for its growth. However, the costs related to it cannot be ignored.

Hurt by the Eurozone debt crisis, Deutsche Bank experienced a fall in trading revenues in the past. Amid the stressed operating environment, lower returns and stringent capital norms, the company is rightsizing its business through job cuts and various restructuring initiatives.

Moreover, owing to macroeconomic uncertainty and the cautious approach of management, we believe that Deutsche Bank will find it hard to report substantial improvement in earnings in the upcoming quarters.

Deutsche Bank currently carries a Zacks Rank #2 (Buy). Other foreign banks worth considering include China Merchants Bank Co., Ltd. (CIHKY), DBS Group Holdings Limited (DBSDY) and Agricultural Bank of China Limited (ACGBY). While China Merchants Bank carries a Zacks Rank #1 (Strong Buy), the other 2 stocks carry a Zacks Rank #2 (Buy).
 

 
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