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Deutsche Bank AG (DB - Analyst Report) reported net income of €51 million ($67.5 million) in the third quarter of 2013, down from €754 million ($998.6 million) in the prior-year quarter. Results suffered due to litigation related expenses.

Additionally, the disappointing performance resulted from rise in expenses and lower revenues. However, improved provisions for credit losses and a strong capital position were the positives.

Notably, litigation reserves increased to €4.1 billion ($5.4 billion), including €1.2 billion ($1.6 billion) of additional provisions taken in the said quarter.

Quarter in Detail

Deutsche Bank reported net revenue of €7.7 billion ($10.2 billion), down 10% year over year. The decline was mainly attributable to decreased revenues in Corporate Banking & Securities (CB&S), Global Transaction Banking (GTB), Consolidation & Adjustments (C&A) and Private & Business Clients (PBC).  However, these negatives were partly offset by an improvement in revenue in the Deutsche Asset & Wealth Management (DeAWM) and Consolidation & Adjustments (C&A) units.

The CB&S revenues were down 26% from the prior-year quarter to €23.9 billion ($31.7 billion). The decrease stemmed from lower revenues in Sales & Trading (debt and other products).

At Deutsche Bank’s GTB business, the sluggish macroeconomic environment with low interest rates and persistent pressure on margins led to a 2% year-over-year fall in revenues to €1.0 billion ($1.3 billion).

Additionally, the PBC segment’s revenues were €2.3 billion ($3.0 billion), down 5% from the prior-year quarter. The decrease was due to a fall in revenues at Postbank and the pressure on deposit revenues caused by the low interest rate environment and reduced volumes.

Revenues in the NCOU fell 8% year over year to €367 million ($486.1 million), mainly due to a reduction of assets following the de-risking activities undertaken by the bank.

However, the DeAWM segment posted a year-over-year revenue rise of 2% to €1.3 billion ($1.7 billion), attributable to enhanced assets under management (AUM) base.

Consolidation & Adjustments (C&A) net revenue improved from negative €410 million ($513.0 million) in the second quarter of 2012 to negative €168 million ($222.5 million).

The provision for credit losses fell 8% from the year-ago period to €512 million ($678.1 million). This decrease was primarily driven by the NCOU and the PBC units, reflecting a favorable environment in Germany but partly offset by higher provisions in CB&S and GTB.

However, non-interest expenses of €7.2 billion ($9.5 billion) were up 4% from the year-ago period. This resulted from increased litigation related expenses, partly offset by a decline in the Operational Excellence Program’s (OpEx) implementation expenses as well as compensation and benefits expenses. Non-interest expenses included cost-to-achieve related to OpEx of €221 million ($292.7 million) in the reported quarter, of which €30 million ($39.7 million) were restructuring expenses.

Deutsche Bank’s Common Equity Tier 1 (CET1) capital ratio (pro-forma Capital Requirements Regulation/Capital Requirements Directive 4 fully loaded) was 9.7% as of Sep 30, 2013, up from 7.8% as of Sep 30, 2012.

Leverage ratio, on an adjusted fully loaded basis, was 3.1% as of Sep 30, 2013 up from 2.6% as of Sep 30, 2012. Risk-weighted assets decreased 9% year over year to €365 billion ($483.4 billion) as of Sep 30, 2013.  

Strategic Efforts

In its Strategy 2015+, Deutsche Bank declared a number of initiatives to boost its competitiveness. These include improvement in efficiency, aggressive cost cuts, a simplified capital structure and a change in the company’s compensation policies. The new compensation program directs payment of bonuses to the chief executives after five years, instead of the former partial payment over a span of three years.

The company contemplates making investments of approximately €4 billion and undertaking other such measures to help achieve full run-rate annual cost savings of €4.5 billion by 2015. These strategies were, on the whole initiated in the third quarter of 2012.

Further, Deutsche Bank aims to reduce its risk-weighted assets and continue with its de-risking measures. In the said quarter, the company achieved about 15% of the 2015 balance sheet reduction target of €250 billion.

Our Viewpoint

Deutsche Bank’s strategic initiatives, including the repositioning of its core business and bolstering of its capital levels augur well for future growth. However, the related costs could weigh on profitability.

Due to 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’s earnings growth might face challenges, going forward.

Deutsche Bank currently carries a Zacks Rank #1 (Strong Buy). Other foreign banks with the same Zacks Rank include Banco Bilbao Vizcaya Argentaria, S.A. (BBVA - Snapshot Report), Credit Suisse Group (CS - Snapshot Report) and Westpac Banking Corporation (WBK).

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