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Will Deutsche Bank AG (DB) Surprise this Earnings Season?

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Deutsche Bank AG (DB - Free Report) is scheduled to report its second-quarter 2014 results on Tuesday, Jul 29.

In the last quarter, this foreign bank delivered disappointing earnings with a 35.3% year-over-year decline in net income. The lower top-line performance was due to a decline in client activity reflecting low volatility and continuing uncertainty in emerging markets. However, decreased expenses, lower provision for credit losses and a strong capital position were the positives.

Will Deutsche Bank impress in the upcoming release after combating the challenges the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q2 Results    

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.

Repositioning of business fundamentals to withstand any further crisis remains the trend of non-U.S. banks in the quarter. Though defensive actions like limiting expenses are still in place and focus on non-interest income is increasing, margin compression and sluggish loan growth would act as the major dampeners.

Further, a prolonged low interest rate environment is not expected to reverse any time soon as central banks of most of the countries will continue to prioritize growth over inflation control. This strategy is sustainable as inflation is the concern of only a few emerging economies. Thus, banks operating in a low interest rate environment will not be able boost revenue through interest income.

The Federal Reserve’s stricter capital rules for foreign banking organizations (FBOs) sizably operating in the U.S. could cripple their balance sheet. Anyway, amid several litigation issues and internal inefficiencies, this foreign bank is striving hard through restructuring initiatives that focus on building capital levels to achieve operational efficiency and reduce risk-weighted assets (RWAs).

Activities of Deutsche Bank during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 50 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Deutsche Bank is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  The Earnings ESP for Deutsche Bank is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 50 cents.

Zacks Rank: Deutsche Bank’s Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Banco Bradesco S.A. (BBD - Free Report) has an earnings ESP of +2.63% and carries a Zacks Rank #3 (Hold). It is scheduled to report its second-quarter results on Jul 31.

The earnings ESP for Banco Santander-Chile (BSAC - Free Report) is +12.96% and it carries a Zacks Rank #3 (Hold). The company is scheduled to release its second-quarter results on Jul 31.

Royal Bank of Canada (RY - Free Report) has an earnings ESP of +3.62% and carries a Zacks Rank #2 (Buy). It is scheduled to report its third-quarter fiscal 2014 (ended Jul 31) results on Aug 22.

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