Deutsche Bank Q3 profits more than double to €649 million

Deutsche Bank AG (DBK-DE: XETRA), the fourth-largest bank in Germany, surprised the market by reporting fiscal 2017 third-quarter profit that more-than doubled from last year. The earnings also crushed the Wall Street expectations.

However, net revenues declined 10% on a y-o-y basis. The market was not impressed by the mixed results and pushed the stock price lower last week. However, we expect a trend reversal in the week ahead due to reasons given below.

During the third-quarter 2017, the net revenues declined €717 million to €6.776 billion, from €7.493 billion in the corresponding quarter last year. The Thomson Reuters’ Consensus estimate was €6.84 billion. For Q3 2017, the lender recorded net income of €649 million, an increase from €278 million last year. The Wall Street analysts had expected the bank to report net income of €281 million.

Deutsche Bank

Decline in trading volumes, poor market volatility, and low-interest rate environment had a negative impact on the third-quarter revenues. In particular, the bank’s bond trading division reported a 36% fall in revenues, from last year, due to decreased client activity.

Segment wise, Corporate & Investment Banking (CIB) revenues fell 23% y-o-y to €3.50 billion, mainly due to poor client activity. Private & Commercial Bank (PCB) revenues increased slightly by 3% to €2.60 billion. The increase was due to a one-time gain from the sale of Concardis GmbH shares. The Deutsche Asset Management (Deutsche AM) division reported flat revenues of €628 million, on a year-over- year basis.

Income before income taxes increased 51% y-o- y to €933 million. Deutsche bank stated that cost reductions were primarily responsible for the strong rise in earnings. Further non-interest expenses were €5.70 billion, down 14% from last year. The bank also had lower restructuring, litigation, and severance expenses.

Notably, last month, the bank agreed to pay US investigators, a sum of $220 million to resolve a case of benchmark interest rate manipulation. Provision for credit losses were €184 million, down 44% from €327 million.

The bank is currently undergoing a restructuring program, which includes integration of retail unit of Postbank and sale of the asset management division. Deutsche bank has plans to create a single legal entity in the second-quarter of 2018, following successful integration. The new entity is expected to have 20 million clients and business volume of €325 billion. The integration will also result in synergies of about €900 million annually by 2022.

Deutsche bank ended September quarter 2017 with a CET1 ratio of 13.8%, compared with 11.1% in the year-ago quarter. Risk-weighted assets declined 7.8% y-o-y to €355 billion. Thus, a strong rise in third-quarter earnings, a decline in the provision for credit losses and an impressive rise in CET1 ratio indicates the possibility of a recovery in the share price.

The historic price chart indicates strong support for the stock at 14.25 levels. Further, the money flow index indicator and on balance volume is rising. That confirms the bullishness in the stock. On the upside, the next resistance for the stock is expected near 16.40 levels.

To benefit from the rally, we wish to stay invested in a call option valid for at least seven trading days. A strike price of about $15.20 is preferred for the trade.

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