A month has passed since Deutsche Bank’s (DB) last earnings report. The shares rose about 9.3% during this period, outperforming the S&P 500.

Will the recent positive trend continue until the next earnings release, or should Deutsche Bank pull back? Before we dive into the reaction of investors and analysts lately, let’s take a look at the latest earnings report to better understand the important factors.

Deutsche Bank’s first-quarter earnings improve year-over-year on higher revenue

Deutsche Bank reported net profit of 1.23 billion euros in the first quarter of 2022 ($1.38 billion) compared to 1.04 billion euros in the year-ago quarter. Additionally, the German lender reported a pre-tax profit of 1.7 billion euros ($1.91 billion), up 4% from the year-ago quarter.

First quarter results benefited from higher net revenues and lower expenses. Strong capital deployment activity during the quarter was another positive factor. An increase in the provision for credit losses was an offsetting factor.

Revenues increase, costs decrease and provisions increase

The bank generated net revenue of 7.3 billion euros ($8.2 billion) in the first quarter, up 1.3% year-on-year. This increase is mainly due to higher revenues in all segments except Corporate & Other.

Non-interest expense of €5.4 billion ($6.1 billion) was down 4% from the year-ago quarter level despite an increase in annual bank levies. Adjusted costs excluding transformation charges and bank levies fell 3% year-on-year to €4.6 billion ($5.2 billion).

The provision for credit losses was 292 million euros ($327 million), up 3.1% from the figure for the first quarter of 2021, which had recorded 223 million euros.

Sector performance

The Corporate Bank division’s net income of 1.5 billion euros ($1.7 billion) was up 11% year-on-year. The segment recorded the highest revenues since the launch of the transformation program and the second consecutive quarter of double-digit revenue growth.

Investment Bank’s net income totaled 3.3 billion euros ($3.7 billion), up 7% year-on-year. This highlights growth in interest rate and foreign exchange revenue, offset by lower origination and advisory revenue.

Private Banking reported net revenue of €2.2 billion ($2.5 billion), up 2% year-on-year. The increase in revenues (excluding adjustments) from German Private Banking, as well as revenues from International Private Banking, led to this increase.

Asset management generated record net revenue of €682 million ($765 million), up 7% year-on-year, mainly driven by higher management fees. Net non-cash asset inflows during the quarter were €5.7 billion ($6.3 billion).

Corporate & Other reported negative net income of €353 million ($396 million) compared to negative net income of €73 million recorded in the same period a year earlier.

Capital Release reported negative net revenue of €5 million ($5.6 million) compared to net revenue of €81 million recorded in the prior year quarter.

The story continues

Mixed capital ratios

The leverage ratio on a fully-adjusted basis was 4.6%, stable compared to the prior year quarter. Risk-weighted assets (RWA) were €24.8 billion ($27.6 billion) at the end of the first quarter, compared to €25.7 billion in the year-ago quarter former. The company remains ahead of its 2022 year-end targets for leveraged exposure and reduced RWAs, and has reduced leveraged exposure by 86% and RWAs by 61 % since its inception in mid-2019.

However, Deutsche Bank’s CET1 capital ratio (fully loaded) stood at 12.8% as of March 31, 2022, down from 13.7% in the prior year quarter.

Capital deployment

In the first quarter, Deutsche Bank had completed approximately 50% of its €300 million share buyback for termination, announced on January 26, 2022 as part of the bank’s aim to distribute approximately €700 million of capital to shareholders during the year. This buyback program ended in April.

Outlook 2022

Management expects revenue to be in the high €26-27 billion range, supported by strong revenue momentum in its core business.

Loan growth of 2 to 3 billion euros per quarter is expected for Corporate Banking and Private Banking.

An after-tax return on average tangible equity (RoTE) of 8% is targeted.

For Core Bank, Deutsche Bank anticipates an after-tax RoTE above 9%.

A cost/revenue ratio of 70% is expected.

The CET 1 capital ratio should be above 12.5%. In addition, the leverage ratio should be around 4.5%.

A capital distribution of approximately 0.7 billion euros, including dividends and share buybacks, is planned.

Financial objectives for 2025

A revenue CAGR of 3.5-4.5% from 2021 to 2025 is projected with net revenues of around €30 billion in 2025.

This should be supported by Corporate Bank revenue growth at a CAGR of 6-7% and Investment Bank revenue growth at a CAGR of 1-2%. Additionally, private banking revenue is expected to grow at a CAGR of 4-5% and asset management revenue is expected to grow at a CAGR of 4-5%.

Management is targeting an after-tax RoTE above 10%.

The cost/income ratio should be less than 62.5%.

The CET1 capital ratio should be maintained at around 13%, subject to a minimum threshold of 200 basis points above the expected maximum distributable amount threshold of around 11%.

The total capital ratio should be around 17.6%.

Average tangible equity is expected to increase at a CAGR of 5% for 2021-2025 (after capital distribution) driven by increased earnings.

The minimum requirement for own funds and eligible liabilities should be 32.8%.

The target leverage ratio is above 4.5%.

A total payout ratio of 50% of net income attributable to shareholders is expected in 2025 and beyond.

Dividend payments of 3.3 billion euros for the financial years 2021-2024 are planned.

Breakdown of capital of approximately €8 billion for the 2021-2025 financial years.

How have the estimates changed since then?

Over the past month, investors have witnessed an upward trend in new estimates.

The consensus estimate changed by 17.78% due to these changes.

VGM Scores

Currently, Deutsche Bank has a low growth score of F, but its Momentum score is faring much better with a B. Following the exact same course, the stock received a B rating on the value side, putting it in the top 40. % for this investment strategy.

Overall, the title has an overall VGM score of C. If you’re not focused on a strategy, this score is the one you should be interested in.

Outlook

Estimates have been on the rise for the stock, and the magnitude of this revision looks promising. Notably, Deutsche Bank has a Zacks rank of #3 (Hold). We expect the title to return online in the coming months.

Performance of an industry player

Deutsche Bank is part of Zacks Banks – Foreign Industry. Over the past month, HSBC (HSBC), a stock in the same industry, has gained 6.5%. The company released its results for the quarter ended March 2022 more than a month ago.

HSBC reported revenue of $12.55 billion in the latest quarter, representing a -5.5% year-over-year change. EPS of $0.70 for the same period versus $0.95 a year ago.

For the current quarter, HSBC is expected to post earnings of $0.96 per share, a change of +12.9% from the prior year quarter. The Zacks consensus estimate has changed -2.1% over the past 30 days.

The general direction and magnitude of the estimate revisions result in a Zacks No. 3 (holding) rating for HSBC. Also, the stock has a VGM score of D.

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