Deutsche Bank's Strong Bounce

Today, Deutsche Bank AG (DB - Snapshot Report) reported a strong bounce in earnings, posting net income before nonrecurring items of EUR1.4 billion compared to a EUR985 million loss in the prior-year quarter. This was well ahead of our EUR198 million estimate for the quarter.

This result was primarily driven by a EUR9.8 billion positive swing in trading income to a gain of EUR1.9 billion from a loss of EUR7.9 billion in the year-ago quarter, partly offset by a 95% drop in net gains on financial assets/liabilities to EUR338 million from EUR6.3 billion last year. Net interest income advanced 44% to EUR3.8 billion.

Not surprisingly, asset quality deteriorated during the quarter, leading to an almost quadrupling in the provision in credit losses to EUR526 million, which would have been worse if not for a EUR60 million release in reserves. Nonperforming loans jumped EUR2.5 billion (or 79%) year over year and EUR1.2 billion (or 26%) sequentially to EUR5.7 billion, resulting in a nonperforming loan ratio of 2.08% compared to 1.53% a year ago and 1.75% at the end of December.

Operating expenses were well controlled, rising only 2% as compensation costs were held in check, with a cost/income ratio of 67.5% versus 103.0% in the year-ago quarter and 134.6% in the December 2008 quarter.

Capital adequacy continues solid, with the Tier 1 ratio rising 10 basis points to 10.2% on growth in retained earnings. This is above DB's 10% target for the Tier 1 ratio.

We currently have a Hold on DB, and note that the Zacks rank is 3, indicating no clear directional pressure on the share price over the near term. The stock is down over 4% from yesterday's closing price of $55.48 in morning trading.

Our estimates are under review.

(US$1 = EUR0.76; 1 ADS = 1 Share)