Deutsche Bank - German banking giant - facing collapse or prosperity?

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In recent years, German banking giant Deutsche Bank has mainly been in the news for scandals and bankruptcy speculations. The company fell into crisis in the late 2010s and has spent the last few years trying to survive by cutting back and letting people go.

However, in 2021, the bank managed to achieve its first proper profitable year in a long time and distributed 700 million euros to investors (400 million euros in dividends and 300 million in share buybacks). The share price is still languishing at the bottom, around 9 euros. According to Yahoo Finance, this gives the bank a P/B ratio of 0.27 and a trailing P/E ratio of 7.8.

The targets in the Q2 2022 report seem achievable, given the weak starting point, and rather appealing: slight revenue growth and a reduction in the cost-to-income ratio from 84.6% in 2021 to “mid-to-low-70%” for 2022.

If this were to materialize: “The bank continues to target a post-tax RoTE1 of 8% (Group) and above 9% (Core Bank) for the year 2022, while recognising that the current operating environment makes delivery on these targets more challenging,” then the P/E ratio would probably be just over 3.

One would think that there is at least a margin of safety in the valuation, and they have managed to reduce staff and risks. Russia-related risks were significantly reduced even before the Ukrainian crisis.

But is the turnaround permanent, or is another bomb already waiting around the corner?

Hopefully, a discussion will emerge, and someone else will start digging into this. The 2021 annual report is 450 pages long, and I’ve only just scratched the surface.

More info in English can be found here: Reports and Events – Deutsche Bank

Q2/22 report: https://investor-relations.db.com/files/documents/quarterly-results/2022/Deutsche_Bank_Q2_2022_Media_Release.pdf

2021 annual report: https://investor-relations.db.com/files/documents/annual-reports/2022/Annual_Report_2021.pdf?language_id=1

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Finanssisektori sijoituskohteena
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Some thoughts as I go through this terribly dull report (2021 report):

  • Deutsche Bank owns 79.5% of DWS, an asset management company (an ownership worth 4.5 billion at the current share price)

  • Credit rating agencies have improved Deutsche Bank’s credit rating over the past year → reduces capital costs

  • Higher loan losses are expected in 2022 (normalization after 2021, when there were hardly any)

  • 2021-2025 total profit distribution target of 8 billion euros - target to distribute 50% of earnings in 2024, partly as dividends and partly as share buybacks

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Q3 2022 results were released about a week ago, looked excellent and exceeded analysts’ forecasts, with last year’s comparable figures in parentheses:

  • Over 1.1 billion in earnings, EPS €0.57 (€0.14)
  • Q1-Q3 2022 EPS €1.46 (€0.81), Q4 is usually weaker.
  • Cost/income-ratio Q3 71.6% (88.9%) Q3 - still room for improvement
  • Book value according to the report €29.62 (€27.32)
  • Common Equity Tier 1 capital ratio 13.3% (13.0%)

Somehow I don’t feel like reducing my position yet at a share price of €9.67.

https://www.cnbc.com/2022/10/26/deutsche-bank-earnings-q3-2022.html

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Deutsche Bank has rallied 50% over the last 6 months (25% over 3 months), so in my view, an okay result triggered a negative price reaction.

25 billion market cap and a full-year net profit of 5.7 billion, though likely due to old tax losses. With a 24% effective tax rate, it would be a solid 4.3 billion. I need to look into the full-year results more closely when I have more time.

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Keeping an eye out as it seems Q2 is out: https://investor-relations.db.com/files/documents/quarterly-results/2023/Deutsche-Bank-Q2-2023-Media-Release.pdf

A bit mild compared to the high expectations for the banking sector, but it’s certainly very cheap if we stay at this level.

Deutsche Bank reports profit before tax of € 3.3 billion
in the first half year of 2023, highest since 2011
Profit before tax of € 3.3 billion in the first half year, up 2% year on year, despite
higher nonoperating costs1
• Profit before tax excluding nonoperating costs up 21% to € 4.0 billion
• Net revenues up 8% year on year to € 15.1 billion
• Noninterest expenses up 8% to € 11.1 billion including nonoperating costs
of € 744 million; adjusted costs1 up 2% to € 10.3 billion
• Post-tax profit of € 2.3 billion, down 7%, reflecting a higher tax rate
• Post-tax return on tangible equity (RoTE)
1 of 6.8%, cost/income ratio of 73%
• Assuming equal apportionment of 2023 bank levies and excluding
nonoperating costs, post-tax RoTE1 of 9.3% and cost/income ratio of 67%
• Net inflows of € 28 billion across the Private Bank and Asset Management
Second-quarter profit before tax of € 1.4 billion, down 9% year on year after
nonoperating costs of € 655 million
• Excluding non-operating costs, profit before tax of € 2.1 billion, up 25%
• Post-tax profit of € 940 million
• Post-tax RoTE1 of 5.4%, cost/income ratio of 76%
• Assuming equal apportionment of 2023 bank levies and excluding
nonoperating costs, post-tax RoTE1 of 8.1% and cost/income ratio of 68%

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Deutsche has been performing strongly in terms of its share price and already surpassed €14 today. Still cheap. Unfortunately, I had to trim part of my position earlier to buy an apartment in Spain, but the majority is still there.

Personally, I see profit distribution through share buybacks as a supporting factor here, and for Finns, it’s more favorable as Germany charges us an outrageously high dividend tax that violates tax treaties.

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Deutsche continues its improving run, which is also reflected in the share price (16.45, +7% today).

Q1 2024

Deutsche Bank reports 10% year-on-year growth in
profit before tax to € 2.0 billion in the first quarter of
2024
Profit growth over prior year quarter drives progress towards key targets
• Profit before tax rises 10% to € 2.0 billion, net profit up 10% to € 1.5 billion
• Post-tax return on average tangible shareholders’ equity (RoTE)1
rises to
8.7%, from 8.3% in the prior year quarter
• Cost/income ratio improves to 68%, from 71% in prior year quarter

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15 parantuneen kvartaalin putki katkesi, Deutsche Bankin Q2 2024: https://www.db.com/news/detail/20240724-deutsche-bank-reports-on-the-second-quarter-of-2024?language_id=1

Kurssi tänään -9% mutta ei tämä nyt niin kauhealta näytä kun Postbank-casen varaus oli jo tiedossa. Olisi tosin kivempi nähdä luvut taulukossa kattavien historiatietojen kanssa.

Second quarter 2024 profit before tax of € 411 million

** Profit before tax of € 1.7 billion ex-Postbank litigation provision, compared to profit before tax of € 1.4 billion in the second quarter of 2023*

Second quarter net revenues rise 2% year on year to € 7.6 billion

** Group commissions & fee income up 12%*
** Net interest income stable in key banking book segments²*
** Origination & Advisory revenues doubled year on year with resilient revenues in Fixed Income & Currencies (FIC)*

Second quarter adjusted costs in line with 2024 guidance at € 5.0 billion

** Noninterest expenses of € 6.7 billion, or € 5.4 billion excluding Postbank litigation provision, down 4% on noninterest expenses in prior year quarter*

Solid capital and risk management during the second quarter

** Common Equity Tier 1 (CET1) capital ratio rises to 13.5%*
** Completion of € 675 million share repurchase programme brings cumulative capital distributions from 2022-2024 to € 3.3 billion*
** Provision for credit losses of € 476 million*

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Deutsche Bank’s results were a disappointment, partly because the bank recorded a 143 million euro loss for the first time since 2020. This was largely due to a litigation provision of over one billion euros related to the Postbank unit; additionally, the bank also had to set aside more money for deteriorating corporate and commercial real estate loans. Investors are not pleased with this.

Deutsche Bank’s results weakened investor confidence in banks in general, but on the other hand, Italy’s UniCredit and Spain’s Santander raised their profit forecasts. BNP Paribas surprised positively with its equity trading revenues, but its fixed-income trading lagged behind its competitors.

Deutsche Bank aims to reach a 30 billion euro revenue target for 2024; furthermore, the bank continues to focus on advisory services and mergers and acquisitions (M&A).

The ECB is investigating Deutsche Bank and other lenders due to risks associated with leveraged finance. However, the bank’s CEO Christian Sewing and CFO James von Moltke believe that the bank has adequately prepared for these risks.

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