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Fitch: Deutsche Bank Stops Revenue Decline in Core Bank in 2Q14; Non-Core Remains a Drag
July 29, 2014 / 4:17 PM / 3 years ago

Fitch: Deutsche Bank Stops Revenue Decline in Core Bank in 2Q14; Non-Core Remains a Drag

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(The following statement was released by the rating agency) FRANKFURT/LONDON, July 29 (Fitch) Fitch Ratings says that increasing the core revenue base remains the main challenge for Deutsche Bank AG (A+/Negative/a) for the coming quarters in order to reach its 2016 profitability targets. The bank's risk-weighted capitalisation and leverage are better placed among its global trading and universal bank peers following the sizeable equity capital increase and issuance of additional Tier 1 capital in 2Q14. However, we view capitalisation in light of both potential adjustments that may need to be made as a result of the ECB's asset quality review and certain regulatory and litigation cases still to be resolved. Leverage ratios in particular will have to remain carefully managed. The results have no immediate impact on Deutsche Bank's ratings. Deutsche Bank was able to stop yoy revenue decline in its core bank in 2Q14, but this followed a relatively weak first quarter, so that first half revenue and pre-tax profit were down 4% and 10% respectively yoy. Including the loss-making non-core operations unit (NCOU), consolidated revenues and pre-tax profit were down 8% and 19%, respectively, for the first six months of 2014 compared with 1H13. Deutsche Bank's consolidated net revenues declined by 4% and pre-tax profits increased by 16% y-o-y in 2Q14. The single biggest driver of the revenue decline was NCOU, where Deutsche Bank also saw a marked slow-down of reductions in risk-weighted assets in 2Q14. Deutsche Bank generated EUR2.6bn pre-tax profit for 1H14, a decline of 19% y-o-y (11% if adjusted for credit valuation adjustments, debit valuation adjustments, fair value adjustments, costs to achieve, litigation and impairments of goodwill). The main driver of the decline was a 8% yoy drop in net revenue while operating expenses declined by only 3%. Deutsche Bank expects operating expenses to remain flat for 2014 despite continued cost savings as costs related to regulatory requirements have increased, including in the US. Deutsche Bank's earnings continue to be negatively affected by litigation charges. Deutsche Bank expects litigation costs, which were zero in 1Q14, to remain high in 2014 and booked EUR0.4bn in litigation charges in the core bank in 2Q14. Deutsche Bank continues to invest in its platform, including improvements to its infrastructure for regulatory reporting. Deutsche Bank's corporate banking and securities (CB&S) businesses generated EUR2.4bn pre-tax profit in 1H14, 11% lower than in HY13. However, 2Q14 was up by 17% compared with 2Q13. In line with its peers, the bank reported a yoy drop in 1H14 in fixed income sales and trading revenues of 6% excluding the effect of a transfer of commodities businesses to NCOU in the first quarter, although this was less pronounced than at most of its peers that have reported to date. Equity sales and trading revenues dropped by 5% compared with 1H13, but net revenue in origination increased by 19%. Deutsche Bank's strong bias towards fixed income trading, where it generates 56% of CB&S net revenue in 1H14 means that fluctuations in debt sales and trading affect its pre-tax profit more than at peers that are more weighted towards equities trading. Deutsche Bank's private and business clients businesses generated EUR923m pre-tax profit in 1H14, a decrease of 7% on 1H13. The drop in 2Q14 pre-tax profits compared with 2Q13 was even more pronounced at 21%. The drop in 1H14 was driven by increased operating expenses in combination with flat revenues. Similarly, global transaction banking saw a 7% yoy decrease in pre-tax profit to EUR595m in 1H14, mainly because of higher expenses related to a litigation charge and flat revenues. Pre-tax profits from Deutsche Bank's asset and wealth management businesses' increased materially to EUR374m, 25% higher than in 1H14, but driven by lower expenses while revenue fell. We believe that Deutsche Bank's strong franchise in corporate and retail banking should enable it to generate sufficient earnings in these segments, particularly in domestic retail banking once it realises cost synergies and benefits from Deutsche Postbank's large customer base. However, low interest rates are denting net revenue in retail banking and in global transaction banking, and Deutsche Bank announced in May that the group's profitability targets set for 2015 had to be delayed to 2016. We expect the bank to make further progress in its underlying cost efficiency after incurring further costs-to-achieve in its strategic plan in 2014, and failure to improve the profitability in its core businesses apart from the less stable earnings from CB&S would put pressure on the bank's Viability Rating (VR). The improvement in Deutsche Bank's regulatory capital ratios, specifically in its fully applied Common Equity Tier 1 (CET1) to 11.5% at end-2Q14 from 9.5% at end-1Q14 reflects mainly the up-lift of around 250 bps from its EUR8.5bn capital raising during the quarter. Deutsche Bank's fully applied CRDIV leverage ratio of 3.4% (up from 2.5% at end-1Q14) also benefited from the issuance of EUR3.5bn of AT1 capital during the quarter. Maintaining sound capitalisation is an important driver of the bank's VR. While the capital strengthening measures in 2Q14 were supportive of Deutsche Bank's VR, the bank's 'a' VR reflects its unchanged capitalisation targets, including maintaining a 10% fully applied CRDIV CET1 ratio and a fully-loaded leverage ratio of 3.5% in the medium term. Overshooting these targets in the short term will not change Fitch's view that maintaining Deutsche Bank's VR at the current level is contingent on the delivery of its recalibration programme, albeit over a longer timeframe. The Outlook on Deutsche Bank's support-driven Long-term Issuer Default Rating is Negative, reflecting our expectation of reducing government support. Contact: Michael Dawson-Kropf Senior Director +49 69 76 80 76 113 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Christian Kuendig Senior Director +44 20 3530 1399 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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