Deutsche Bank Holds It Together

We are continuing our Hold on Deutsche Bank AG (DB - Snapshot Report). DB posted net income before nonrecurring items of 1.4 billion versus a 985 million loss a year ago, well ahead of our 198 million estimate.

This result was primarily driven by a 9.8 billion positive swing in trading income to a gain of 1.9 billion from a loss of 7.9 billion in the year-ago-quarter, partly offset by a 95% drop in net gains on financial assets/liabilities to 338 million from 6.3 billion last year. Net interest income advanced 44% to 3.8 billion.

Asset quality deteriorated, leading to an almost quadrupling in the provision for credit losses to 526 million, which would have been worse if not for a 60 million release in reserves. Nonperforming loans jumped 2.5 billion (or 79%) year over year and 1.2 billion (or 26%) sequentially to 5.7 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 December 2008. DB cut the dividend to 0.50 for 2008 from 2007's 4.50.

We are raising our 2009 estimate to $5.75 from $3.50 due to the first quarter overage and higher revenue estimates. Our initial 2010 estimate is $6.20.