Deutsche Bank AG (DB) reported net income of €441 million ($551 million) in the fourth quarter of 2014, compared with loss of €1.37 billion ($1.86 billion) in the prior-year quarter. Notably, in the reported quarter, the bank recorded income tax benefit of €189 million ($236 million), primarily due to changes in the recognition and measurement of deferred taxes.
The bank reported profit before income taxes of €253 million ($316 million), significantly up from a loss of €1.77 billion ($2.41 billion) in the prior-year quarter. Lower provision for credit losses and litigation costs along with higher revenues and lower expenses were the positives.
For the year 2014, the bank reported net income of €1.69 billion ($2.25 billion), up from €681 million ($904 million) in 2013. Results included income tax expense of €1.4 billion ($1.9 billion) versus €775 million ($1.03 billion) in 2013.
Performance in Detail
For the year 2014, Deutsche Bank reported net revenue of €31.95 billion ($42.46 billion), up around 1% year over year. The rise was primarily attributable to higher Corporate Banking & Securities (CB&S) and Global Transaction Banking (GTB) revenues.
The bank reported net revenue of €7.83 billion ($9.78 billion) in the reported quarter, up 19.4% year over year. The rise was attributed to increased revenues at CB&S, GTB, Deutsche Asset & Wealth Management (DeAWM) and Non-Core Operations Unit (NCOU).
CB&S revenues were up 20% from the prior-year quarter to €3.0 billion ($3.7 billion). The increase stemmed from higher revenues in Debt and Equity Sales & Trading, mainly driven by higher volatility.
The Private & Business Clients (PBC) segment’s revenues totaled €2.4 billion ($3.0 billion), in line with the prior-year quarter. Notably, higher revenues from Investment & insurance products were offset by reduced deposit revenues from persistent margin pressure.
At Deutsche Bank’s GTB business, revenues of €1.0 billion ($1.2 billion) were up 7% from the year-ago figure. Strong volumes and a positive trend in Asia and Americas were partly offset by the impact of an unstable market environment.
Meanwhile, the DeAWM segment posted revenues of €1.2 billion ($1.5 billion), up 5% year over year. The upsurge was driven by solid alternative business and overall impressive performance in Wealth Management offerings.
NCOU recorded revenues of €161 million ($201 million), exhibiting a significant year-over-year increase of €318 million. The increase was mainly due to de-risking gains.
The provision for credit losses descended 49% from the year-ago period to €369 million ($460.8 million). This decrease was primarily driven by lower provisions in the NCOU unit.
Non-interest expenses of €7.2 billion ($9 billion) were down 5% from the year-ago period. This resulted primarily from reduced general and administrative expenses, partly offset by increased compensation and benefit expenses. Notably, non-interest expenses included cost-to-achieve related to OpEx of €363 million ($453.4 million) and litigation charges of €207 million ($258.5 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 11.7% as of Dec 31, 2014, up from 9.7% as of Dec 31, 2013. Leverage ratio, on an adjusted fully loaded basis, was 3.5% as of Dec 31, 2014 compared with 2.4% as of Dec 31, 2013. Risk-weighted assets valued €394 billion ($478.9 billion) as of Dec 31, 2014, up 12.6% year over year.
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 the worldwide economic volatility, 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 the profitability. Moreover, given the stressed operating environment and ongoing litigation issues, we do not expect any significant improvement in earnings in the coming quarters.
Deutsche Bank currently carries a Zacks Rank #5 (Strong Sell).
Other foreign banks that are expected to release results in the coming days include Itau Unibanco Holding S.A. (ITUB), Mitsubishi UFJ Financial Group, Inc. (MTU) and The Royal Bank of Scotland Group plc (RBS). Itau Unibanco and Mitsubishi UFJ will report December quarter-end results on Feb 3, while Royal Bank of Scotland is scheduled to report on Feb 26.
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