Deutsche Bank Reports Unexpected Q3 Profit, But Wall Street Yawns Asking For More

After serving much drama to its shareholders - and global markets - over the past couple of months, when its stock tumbled to all time lows following the news of the bank's $14 billion DOJ settlement ask, Deutsche Bank provided some relief when earlier this morning it reported a modest, unexpected profit of €256 million for the third quarter on lower litigation and restructuring costs, beating consensus estimates of a €394 million loss, and a far better number than the €6 billion loss reported one year ago. Revenues were also a modest improvement to consensus expectations of €7.19BN, coming in at €7.49BN as a result of a 14% jump in fixed income trading revenues.

The bank's closely watched core tier one capital ratio rose from 10.8% at the end of June to 11.1% at the end of September, as Deutsche cut its risk-weighted assets by €18bn to €385bn. CFO Marcus Schenck said that the ratio would get a further boost of 40 to 50 basis points once the sale of its stake in Chinese lender Hua Xia was completed.

CEO John Cryan repeated that Deutsche was making “good progress” on its restructuring, but admitted that results had been “overshadowed” by its negotiations with the DOJ. “This had an unsettling effect. The bank is working hard on achieving a resolution of this issue as soon as possible."

The failure to provide some additional guidance on the bank's settlement process as well as on its recapitalization status is why the shares have undone the entire 3% gap higher, and were trading fractionally in the red. Raising a red flag, Deutsche Bank also said that it saw €9BN in outflows from its new business for private, wealth and commercial clients in the third quarter.

In its Q3 interime report the bank revealed that it had suffered reduction in business volumes as result of "negative perceptions" concerning business and prospects amid talks tied to RMBS settlement with the DoJ, and added that it saw business reductions and asset outflows particularly in parts of global markets, wealth management business.

In a letter to employees, CEO Cryan said that Deutsche Bank's end-3Q liquidity reserve was ~€200b, down €23 billion from a quarter earlier, and said that the bank’s situation will remain tough for some time. He also said that while talks with DOJ advancing, and it was working to resolve matter as soon as possible, the environment worsened in some important areas.

On the conference call Cryan said that the bank needs to “restructure and modernize the bank faster and with higher intensity,” and added the following remarks:

  • “We are taking steps now particularly to achieve additional cost savings and RWA reductions”
  • “We are also addressing the more challenging outlook in our planning to ensure we achieve our financial goals”
  • “We aim to be more ambitious in headcount reduction” and “give preference to internal candidates”

Finally, when looking at the results, Wall Street analysts said that that while the positive surprise is a relief, it’s was also mostly irrelevant because of potential impact from DOJ settlement.

Below, courtesy of Bloomberg, is a summary of sellside opinions on the earnings:

CITI (neutral/high risk) says adj. pretax of EU1.1b that excludes revamp, litigation and other charges exceeds market expectation almost by 3x

  • Statutory pretax profit of EU0.6b also beat consensus est for a loss of EU0.6b
  • Beat driven by revenue, lower costs
  • Most of beat is from Global Markets; CIB and AM also beat
  • Capital ratios are in line
  • Litigation provisions rise to EU5.9b vs EU5.5b
  • Lack of update on litigation, plan to improve capital may weigh on stock today
  • Adj. costs for 2016 now expected to be lower vs 2015

UBS (neutral) says Deutsche’s 3Q is a relief, was beat on every line

  • Revenue, costs, pretax, net all significantly above consensus and UBS ests
  • FICC and CIB were strong
  • Beat mostly due to FICC in GM and NCOU in CIB
  • Capital and leverage ratios in line
  • Focus remains on litigation, HuaXia stake sale

KEEFE, BRUYETTE & WOODS (underperform) says 3Q results are irrelevant even if they are better than expected

  • Results do not indicate a turnaround even as they seem to signal healthy balance sheet, better profit metrics
  • NII revenue may halve if interest rates remain low for long period, could result in losses by 2020
  • Deutsche’s challenge is to generate sustainable Free Cash Flow in current rate environment

GOLDMAN SACHS (neutral) says market should see this as a “constructive” set of results, view it with relief

  • P&L highlight is net income vs GS est for loss of EU269m; consensus est for loss of EU610m
  • Costs were also lower, adj. beat to consensus is EU560m
  • CET1 gained 30bp to 11.1% on drop in RWAs
  • Liquidity reserve remains generous at EU200b
  • Deposits were broadly stable with exception of other customers, unsecured wholesale deposits

COMMERZBANK (hold) says 3Q profit was boosted by lower than expected litigation expenses, better than expected sales & trading revenue

  • Net income EU256m compares to Commerzbank est. loss EU765m
  • Litigation expenses were EU501m vs est. EU1b
  • Debt sales & trading revenue EU2.07b vs est. EU1.56b

MORGAN STANLEY (equal-weight) says 3Q beat is strong, shows progress on revamp

  • Revenue is stronger, costs down for 4th consecutive quarter
  • Performance was especially good at Global Markets, CIB which both beat consensus
  • Retail banking looks a bit challenged in Germany
  • NCOU managed to reduce RWAs by EU10b with only a EU538m loss