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Impacted by huge litigation costs, Deutsche Bank AG (DB - Analyst Report) reported net loss of €965 million ($1.3 billion) in the fourth quarter of 2013 as compared with a loss of €2.5 billion ($3.4 million) in the prior-year quarter. Results included Credit Valuation Adjustment (CVA), Debt Valuation Adjustment (DVA) and Funding Valuation Adjustment (FVA) charges of €623 million ($847.8 million), cost-to-achieve of €509 million ($692.7 million) and litigation charges of €528 million ($718.6 million).

For the year 2013, the bank reported net income of €1.1 billion ($1.5 billion), up from €315 million ($405 million) in 2012. Results included litigation expenses of €2.5 billion ($3.3 billion) as compared with €2.6 billion ($3.3 billion) in the prior year.

Lower revenues and higher provision for credit losses were the negatives for the quarter. However, decrease in expenses and a strong capital position were the positives.

Performance in Detail

The bank reported net revenue of €6.6 billion ($9.0 billion) in the reported quarter, down 16% year over year. The decline was mainly attributable to decreased revenues in Corporate Banking & Securities (CB&S) and Global Transaction Banking (GTB).  However, these negatives were partly offset by an improvement in revenue in the Deutsche Asset & Wealth Management (DeAWM) unit.

For the year 2013, Deutsche Bank reported net revenue of €31.9 billion ($42.4 billion), down 5.3% year over year. The decline was primarily attributable to lower CB&S revenues and a slight decrease in GTB revenues.

Quarterly Segments’ Performance

CB&S revenues were down 27% from the prior-year quarter to €2.5 billion ($3.4 billion). Excluding the effects of DVA, CVA and FVA, revenues declined 13% year over year. The decrease stemmed from lower revenues in Fixed Income & Currencies business.

At Deutsche Bank’s GTB business, revenues of €976 million ($1.3 billion) were down 13% year over year. Notably, excluding one-time items, revenues were slightly above the prior-year quarter. The increase was driven by elevated transaction volumes and higher client balances that mitigated the persistent pressure on margins due to the low interest rate environment.

Additionally, the Private & Business Clients (PBC) segment’s revenues were €2.4 billion ($3.3 billion), in line with the prior-year quarter.

Non-Core Operations Unit (NCOU) recorded negative revenues of €101 million ($137.5 million), mainly due to a reduction of assets following the de-risking activities undertaken by the bank.

Consolidation & Adjustments (C&A) net revenue deteriorated from negative €129 million ($167.3 million) in the fourth quarter of 2012 to negative €336 million ($457.3 million) in the reported quarter.

However, the DeAWM segment posted a year-over-year revenue rise of 8% to €1.2 billion ($1.6 billion), attributable to growth in higher margin products.

The provision for credit losses jumped 58.8% from the year-ago period to €689 million ($937.7 million). This increase was primarily driven by higher provisions in CB&S, GTB, DeAWM, PBC and NCOU units.

However, non-interest expenses of €7.0 billion ($9.5 billion) were down 34% from the year-ago period. This resulted from decreased litigation related expenses and lower impairment of goodwill and intangibles as compared with the prior-year quarter. Notably, non-interest expenses included cost-to-achieve related to OpEx of €509 million ($692.7 million) in the reported quarter.

Deutsche Bank’s Common Equity Tier 1 (CET1) capital ratio (pro-forma Capital Requirements Regulation (CRR)/Capital Requirements Directive 4 (CRD 4) fully loaded) was 9.7% as of Dec 31, 2013, up from 7.8% as of Dec 31, 2012. Leverage ratio, on an adjusted fully loaded basis, was 3.1% as of Dec 31, 2013 up from 2.6% as of Dec 31, 2012. Risk-weighted assets decreased 11.5% year over year to €355 billion ($483.1 billion) as of Dec 31, 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.

Our Viewpoint

Amid the worldwide economic volatility and the continuing Eurozone crisis, the company is focused on building its capital level. Strategy 2015+ efforts are encouraging and we expect such efforts to help improve its operating efficiency. However, the related costs could weigh on the profitability. Moreover, given the stressed operating environment, we do not expect any significant improvement in earnings in the coming quarters.  

Deutsche Bank currently carries a Zacks Rank #2 (Buy). Other foreign banks with the same Zacks Rank include BBVA Banco Franc (BFR - Snapshot Report), Barclays PLC (BCS - Analyst Report) and The Royal Bank of Scotland Group plc (RBS - Snapshot Report).

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