Aided by improved performance at its investment bank unit, Deutsche Bank AG's (DB) net income attributable to its shareholders came in at ¬747 million ($935 million) in third quarter 2012, up 3% from ¬725 million in the prior-year quarter. On a per share basis, the company reported earnings per share of ¬0.78 in the reported quarter, ahead of ¬0.74 reported in the year-ago period.
The quarterly results reflect enhanced revenues. Particularly, the performance in its Corporate Banking and Securities segment, improved significantly as market conditions bettered and client activity increased. However, the positives were mostly offset by costs related to restructuring efforts and litigation issues and this almost neutralized the year-over-year increase.
Moreover, Deutsche Bank continues with its efforts to de-risk its balance sheet. It implemented strategic measures in the third quarter to lower costs, improve efficiency and reduce complexity. Approximately 1,200 of the 1,500 announced headcount reduction was completed by the end of third quarter 2012.
Quarter in Detail
Deutsche Bank reported net revenue of ¬8.7 billion in the reported quarter, up 18% from the comparable quarter in the prior year. Improved market conditions and higher market activity pulled up its Corporate Banking and Securities (CB&S) revenues 65% from the prior-year quarter to ¬4.3 billion.
At Deutsche Bank's Global Transaction Banking (GTB) business, persistent growth and solid business volumes aided a 6% year-over-year expansion of revenues to ¬1.0 billion.
Moreover, Asset and Wealth Management (AWM) segment benefited from investment sale gain, increased revenues due to market appreciation as well as a hike in performance fees and posted an 11% year-over-year escalation of revenues to ¬971 million. Also, revenues at Deutsche Bank's Private & Business Clients (PBC) segment were ¬2.6 billion in the reported quarter, representing an augmentation of 5% from the prior-year quarter.
The provision for credit losses at Deutsche Bank elevated 20% from the year-ago period to ¬555 million in the reported quarter. Majority of the increase was attributable to higher provisions for credit losses recorded in CB&S, partly mitigated by lower provision in PBC segments.
However, Deutsche Bank's non-interest expenses of ¬7.0 billion in the quarter under review were up 18% from the year-ago period. Increased compensation-related expenses, restructuring costs, higher litigation-related expenses as well as increased policyholder benefits and claims in Abbey Life contributed to this escalation in expenses in the reported quarter. In the quarter under review, ¬276 million of restructuring costs were incurred while litigation issues cost the company ¬289 million.
Deutsche Bank's core Tier 1 capital ratio based upon Basel 2.5 rules came at 10.7% at the end of the third quarter, up from 10.2% at the end of the prior quarter. The company adopted de-risking measures that led to decrease in capital deduction items and reduced risk-weighted assets.
Risk-weighted assets moved down to ¬366.1 billion at the end of the reported quarter from ¬372.6 billion at the end of the prior quarter. Total assets waned by 2% to ¬2.19 trillion at the end of the third quarter as against ¬2.24 trillion at the end of the prior quarter.
Deutsche Bank is focused on scaling back its risk-weighted assets and de-risking measures are on track. The company aims at achieving ¬90 billion of risk-weighted assets equivalent reduction by March 31, 2013. Of this, reduction worth ¬25 billion has already been achieved as of September 30, 2012.
In its Strategy 2015+, announced in September 2012, Deutsche Bank disclosed a number of initiatives. These are aimed at bolstering its competitiveness through efficiency improvements including costs cuts and reduced complexity.
The company contemplates making investments of about ¬4 billion over the next three years in such measures to help achieve full run-rate annual cost savings of ¬4.5 billion by 2015. The initial phase of this revamping initiative has been implemented in the third quarter of 2012.
One of Deutsche Bank's rivals, UBS AG (UBS), reported a loss in the third quarter. In addition to this, the company announced a massive job cut over the next few years. The company has detailed a major overhaul of its business, particularly at its Investment Bank division, and aims to trim down over 15% of its workforce to achieve headcount of approximately 54,000 by 2015.
UBS AG reported third quarter net loss attributable to shareholders of CHF 2.2 billion ($2.3 billion) or CHF 0.58 per share, which substantially lagged the prior quarter's profit of CHF 425 million or CHF 0.11 per share and year-ago quarter's earnings of CHF 1.0 billion or CHF 0.27 per share. The quarterly results were primarily affected by impairment losses as well as an own credit loss.
Deutsche Bank has adopted several strategic initiatives, including the repositioning of its core business and bolstering of its capital levels. While such initiatives augur well, costs associated with such efforts cannot be denied.
Hurt by the Euro zone debt crisis, Deutsche Bank experienced trading revenue declines in the past. Amidst the stressed operating environment, lower returns and stringent capital norms, Deutsche Bank is rightsizing its business to meet such challenges.
As a matter of fact, Deutsche Bank is also facing scrutiny for its alleged participation in interest rate manipulation, including Libor. Moreover, given the stressed operating environment with macroeconomic uncertainty and the cautious approach of management, we believe any substantial uplift in the earnings of Deutsche Bank would remain elusive in the upcoming quarters.
Yet, restructuring initiatives and de-risking measures are encouraging and we believe that such efforts would help improve the company's operating efficiency in the future.
Notably, in addition to Deutsche Bank and UBS AG, Royal Bank of Scotland Group Plc. (RBS) and Credit Suisse Group AG (CS), have decided to slash workforce to address such aforementioned issues. A number of U.S. banks such as Citigroup Inc. C) and Bank of America Corp. (BAC), chose business restructuring post the financial crisis.
Deutsche Bank AG currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.