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Deutsche Bank (DB) Up 14.9% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Deutsche Bank (DB). Shares have added about 14.9% in that time frame, outperforming the S&P 500. Will the recent positive trend continue

https://finance.yahoo.com/news/deutsche-bank-db-14-9-153103543.html

29/05

Fitch Affirms Deutsche Bank at 'BBB', Outlook Negative Thu 28 May, 2020 

A Negative Outlook has been assigned to the Long-Term IDR. The rating affirmation reflects our expectation that the bank will continue to make progress with its strategic turnaround despite additional challenges arising from the coronavirus crisis.

However, we continue to see medium-term risks to Deutsche Bank's strategy and financial profile in view of the weak economic outlook, which is reflected in the Negative Outlook.

The restructuring should result in a more focused and profitable business model, but is weighing on the bank's financials in the near-term, at a time when the external environment has also come under shock due to the coronavirus pandemic and related lockdowns.

Fitch sees Deutsche Bank materially on track to achieving its targets, having progressed with the cost reduction and demonstrated reasonable ability to grow core investment banking revenues in favourable market conditions in 1Q20.

Capitalisation has, and will continue to, come under pressure due to larger credit losses eroding Deutsche Bank's thin pre-provision operating profit, while risk-weighted assets (RWA) will temporarily increase in 2Q20.

Although deviations from the original capital target are small, and accompanied by more flexibility to meet capital requirements, we see medium-term risks from larger-than-forecast credit losses, or failure to progress with cost or deleveraging targets. We expect larger expected credit losses (ECLs) to worsen the bank's operating loss in 2020, although the larger ECLs may be partly compensated by income growth in the investment bank.

Continued reduction of operating costs, lower, albeit still significant, transformation-related charges, and some revenue growth, particularly in the investment and corporate bank, should allow the bank to improve profitability in 2021, subject to a disciplined execution of the strategy. Cost reductions remain the biggest driver of Deutsche Bank's performance improvement, but we also believe this is contingent on the bank maintaining a positive income trajectory in the core investment bank and demonstrating the benefits of its core corporate bank franchise.

A lower interest rate outlook and a weaker growth environment will be challenging for the corporate bank, but the division can also benefit from its franchise to support German businesses through the pandemic and deepen client relationships.

However, we see downside risk to the guidance given the still unknown path and economic repercussions of the pandemic. ECLs were EUR506 million in 1Q20, a 3.6x increase yoy, and would have been about EUR100 million larger if the bank had considered the April update of its macroeconomic forecasts.

ECLs are likely to worsen in 2Q20 before subsiding. The bank reported Stage 3, including purchased or originated credit-impaired (POCI), financial assets of 2.2% of gross loans at end-1Q20, which is comparable with higher-rated peers'. Deutsche Bank went into the crisis with good capital buffers but RWA inflation from drawdowns on committed credit facilities and prudential valuation adjustments started eroding its CET1 ratio, which fell to 12.8% at end-1Q20, including about 40bp related to COVID-19.

We expect further pressure in 2020, due to losses and core RWA growth, which will to an extent be mitigated by the run-down of the Capital Release Unit, delayed regulatory inflation from the ECB's targeted review of internal models, and the expected implementation of EU legislation allowing add-backs to the CET1 ratio for expected credit losses for performing exposures.

Also, regulatory changes adopted by the ECB at the beginning of the crisis create flexibility for banks to meet total capital requirements with a higher share of non-CET1 capital. Access to funding and liquidity are supported by the bank's conservative liquidity position, negative net refinancing needs in 2020 (including the ability to lower the share of more expensive senior non-preferred debt) and access to liquidity facilities offered by the ECB and other central banks (including TLTRO 3).

In the current environment of potential disruptions to market confidence and increased issuance spreads, Deutsche Bank's stock of legacy senior unsecured debt that qualifies as senior non-preferred debt (SNP) in Germany is an advantage compared with peers based in other jurisdictions that have yet to complete the build-up of bail-in buffers. Some weakening of liquidity metrics was reported, due to around EUR18 billion drawdowns on revolving credit facilities, but liquidity coverage ratio (LCR) of 132% at end-1Q20 is broadly in line with management's long-term target and European peers'.

In May 2020, Deutsche Bank merged its two German legal entities, which above all should benefit its ability to meet net stable funding ratio requirements on a legal entity basis, avoiding funding inefficiencies.  

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