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Impacted by a disappointing top-line performance, Deutsche Bank AG (DB - Analyst Report) reported net income of €238 million ($326.4 million) in the second quarter of 2014, down from €335 million ($437.4 million) in the prior-year quarter. However, decreased expenses, lower provision for credit losses and a strong capital position were the positives.

The bank reported net revenue of €7.9 billion ($10.8 billion) in the reported quarter, down 3.7% year over year. The decline can be attributed to decreased revenues at Corporate Banking & Securities (CB&S), Private & Business Clients (PBC) unit and negative revenues at Non-Core Operations Unit (NCOU). However, these negatives were partly offset by an improvement in revenue at the Deutsche Asset & Wealth Management (DeAWM) segment.

Quarterly Segmental Performance:

CB&S revenues were down 1% from the prior-year quarter to €3.5 billion ($4.8 billion). The decrease stemmed from lower revenues in Sales & Trading, mainly in equities, mostly offset by growth in Origination & Advisory revenues.

The PBC segment’s revenues totaled €2.4 billion ($3.3 billion), down 3% from the prior-year quarter. The decline was led by non-recurring items associated with Postbank that occurred in the prior-year period.

NCOU recorded negative revenues of €44 million ($60.3 million) compared with revenues of €279 million ($364.3 million) in the prior-year quarter. The decrease was mainly due to €314 million of accumulated losses following the restructuring of Maher Terminals’ debt financing.

At Deutsche Bank’s Global Transaction Banking (GTB) business, revenues of €1.0 billion ($1.4 billion) were in line with the year-ago figure.

Meanwhile, the DeAWM segment posted a year-over-year revenue rise of 9% to €1.1 billion ($1.5 billion), attributable to favorable mark-to-market movements on positions of policyholder in Abbey Life.

The provision for credit losses descended 47% from the year-ago period to €250 million ($342.9 million). This decrease was primarily driven by lower provisions in the NCOU unit.

Non-interest expenses of €6.7 billion ($9.2 billion) were down 4.3% from the year-ago period. This resulted from decreased compensation and benefit expenses and reduced policyholder benefits and claims. Notably, non-interest expenses included cost-to-achieve related to OpEx of €375 million ($514.3 million) and litigation charges of €470 million ($644.6 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) stood at 11.5% as of Jun 30, 2014, up from 10.0% as of Jun 30, 2013. Leverage ratio, on an adjusted fully loaded basis, was 3.4% as of Jun 30, 2014. Risk-weighted assets valued €399 billion ($547.2 billion) as of Jun 30, 2014.

As of Jun 30, 2014, total equity came in at €68.4 billion ($93.3 billion), up 24% from the end of 2013. The upsurge was the result of a capital increase of €8.5 billion from the issuance of 359.8 million new common shares in Jun 2014 and the issuance of new additional equity components (Additional Tier 1 securities, treated as equity according to IFRS) worth €3.5 billion on May 20, 2014.

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 a period of five years, instead of the former partial bonus payment after every three years.

The company intends to invest approximately €4 billion and undertake other such measures to achieve full run-rate annual cost savings of €4.5 billion by 2015 and an adjusted Cost/Income ratio of 65% in 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 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 the initiative to help improve operating efficiency. However, the related costs could weigh on 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 #3 (Hold).

Competitive Landscape

The Royal Bank of Scotland Group plc’s (RBS - Snapshot Report) first-half 2014 profit from continuing operations came in at £1.92 billion ($3.20 billion), highlighting a rise of  more than twofold from £696 million ($1,074.9 million) in the prior-year comparable period. Results were driven by lower loan impairment losses and reduced operating expenses. Additionally, the results reflected higher net interest income. However, reduced non-interest income hampered the results to a certain extent.

HDFC Bank Ltd.’s (HDB - Analyst Report) first-quarter fiscal 2015 (ended Jun 30) results recorded a net profit of INR22.33 billion ($0.37 billion), up 21.1% year over year. The results benefited from a rise in net interest income. Moreover, deposit and loan balances continued to show improvement. However, higher operating expenses and fall in non-interest revenues were causes of concern. Again, credit quality was a mixed bag.

Among other foreign banks, ICICI Bank Ltd. (IBN - Analyst Report) is expected to release results for the quarter ended June on Jul 30.

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