Deutsche Bank AG Q3 Results Update

Shares of Deutsche Bank AG (ETR:DBKGn) (NYSE:DB) fell on Wednesday following its third-quarter results, which showed an increase in loan losses that exceeded market expectations.

At 3:12 am (0712 GMT), Deutsche Bank AG was trading 4.8% lower at €15.530.

> "While the increase in loan losses in Q3 is disappointing although not totally unexpected, we believe it reflects the environment rather than being company-specific," said analysts from RBC Capital Markets.

Deutsche Bank's loan loss charges amounted to €494 million, surpassing the €441 million forecast by analysts. This rise in provisions was primarily due to increased Stage 3 provisions, which rose to €482 million, attributed to challenges in specific portfolios, such as commercial real estate and Postbank integration costs.

Despite the heightened provisions, Deutsche Bank reaffirmed its capital distribution plan, indicating confidence that these challenges will not affect its broader financial goals.

The bank reported a third-quarter net profit of €1.633 billion, exceeding the consensus estimate of €1.523 billion. The pre-tax profit also came in higher than expected at €2.262 billion.

Underlying pre-provision profit was 6% above expectations, with revenues from core divisions 2% higher than anticipated. However, corporate and private banking divisions showed some softness, with corporate bank revenues declining 3% year-on-year due to shrinking deposit margins. Loan volumes also shrank by 1% across both banking segments.

In contrast, the investment bank performed well, with revenues rising 11% year-on-year, fueled by strong results in fixed income and advisory fees, which increased 24%. This performance surpassed U.S. peers, which reported a 31% increase in O&A fees during the same period.

Management expressed optimism about the investment bank's pipeline heading into the fourth quarter, suggesting continued momentum, despite flat net interest income in the banking book.

Analysts at RBC Capital Markets noted that Deutsche Bank’s investment banking performance offset some revenue pressures in other segments but cautioned that increased loan losses might negatively impact investor sentiment, especially concerning the bank's commercial real estate exposure.

Nevertheless, Deutsche Bank is on track to reach its 2024 revenue guidance of €30 billion, buoyed by investment banking strength and higher expected asset management revenues.

The bank's CET1 ratio—a measure of financial strength—was at 13.8%, slightly higher than the 13.7% consensus. Efforts to optimize risk-weighted assets have already resulted in €22 billion in reductions, with a target of €25-30 billion by 2025. Deutsche Bank has also requested authorization for a share buyback, aiming to exceed its previous €8 billion distribution target across 2024-2025.

The loan loss guidance for 2024 has been revised upward to €1.8 billion, reflecting ongoing challenges from Postbank integration and two larger corporate credit events. However, the bank projects that loan loss provisions will normalize by 2025, with consensus estimates indicating €1.457 billion in provisions next year.

RBC analysts believe that while near-term elevated credit losses are concerning, the long-term outlook remains stable, particularly with a target return on tangible equity (ROTE) of over 10% by 2025, in contrast to an 8.8% consensus estimate.

Litigation continues to be a significant concern for Deutsche Bank, especially concerning the ongoing Postbank case. A ruling from the Cologne court is anticipated soon, although its immediate impact remains unclear. Deutsche Bank has settled with several claimants, covering 60% of total claims, yet further legal battles persist, potentially affecting the bank’s outlook.