AM-C Deutsche Bank Aktiengesellschaft (NYSE:DB) released its fourth-quarter earnings report last week, revealing an earnings-per-share miss of 35 cents, coupled with a revenue miss of $213.4 million. Moreover, the market has acted unfavorably toward the German bank’s stock as many investors believe the firm’s quarterly results were overstated by non-core events such as the sale of its advisory business in Italy and a substantial realized tax benefit. After critically examining Deutsche’s latest financial report, we discovered a few variables worth considering; let us traverse into a more detailed discussion. A Thorough Reviewal Of Deutsche Bank’s Q4 Earnings Assessing Key Elements As per its fourth quarter, Deutsche posted 4.81% in year-over-year revenue growth, with its quarterly net interest income surging by 27% while non-interest income slipped by 13%. Starting with net interest income. The segment’s success was due to 15% year-over-year growth in private banking loans and 59% in corporate banking debt. P&L Statement (Click on Image to Enlarge) (Deutsche Bank) The valuation of Deutsche Bank’s debt securities held at amortized cost has increased by 3% year-over-year. We anticipate that elevated interest rates and a renewed appetite for the debt market will continue supporting Deutsche’s interest-bearing securities. Furthermore, the recent surge in the European equity markets suggests Deutsche could recoup its 13% in year-over-year non-interest segment losses. Moreover, a revaluation of the bank’s held for trading assets is likely to add substantial worth to the bank’s tangible book value. We think dealmaking will improve this year, as a rebound in global equity markets could attach momentum to IPOs, asset management, and brokerage services. However, elevated interest rates and equity risk premiums mean capital structures are not yet desirable enough for M&A activity to succeed. Nevertheless, it is unlikely that Deutsche’s commission and fee-based business will drop by another 27% in 2023 (as it did year-over-year). Assets (Click on Image to Enlarge) (Deutsche Bank) A risk assessment of Deutsche’s asset base implies that the bank is on solid ground. Despite a shaky season in the Eurozone, Deutsche improved its CET1 ratio by 3% and its total capital ratio by 5% during the past year. Although the bank’s risk attribution could yield benefits in the succeeding quarters, we urge investors to take notice of Deutsche’s receding stage 1/level 1 tiered assets, which, if continued, could phase down the quality of the bank’s overall asset mix. Risk Assessment (Click on Image to Enlarge) (Deutsche Bank) Non-Core Events As mentioned in the introduction, Deutsche Bank recently benefitted from non-core gains, which many investors believe overstated its fourth-quarter earnings. Deutsche’s €1.4 billion gain on tax assets is an odd shock that is inherent in accrual accounting practices. The good news is that Deutsche’s Beneish M-Score of -2.05 suggests that the bank is not known for aggressive earnings recognition; therefore, we do not see the event as a material risk. Furthermore, the firm’s €310 million gain on its Italian financial advisory business sale can be backed out of its core earnings for valuation purposes. Nevertheless, the move could adjust the bank’s overall efficiency and liquidity. Where To From Here For DB Stock? Deutsche Bank’s stock lends an interesting debate, as its price-to-book ratio of 0.32 suggests that it is fundamentally undervalued. However, the stock’s normalized price-to-book multiple of 0.27 provides a juxtaposition, as it indicates that Deutsche Bank’s cyclical valuation threshold is lower than most think. Furthermore, although Deutsche Bank said it backs a €0.30 full-year dividend, it does not believe that share buybacks are possible, as market conditions remain uncertain. Various investors might see this as a negative attribute and divest from the stock. Noteworthy Risks To Consider Even though a few risks were outlined throughout the article, additional risks must be considered to balance the argument. A significant risk pertaining to most banks, and Deutsche especially, is yield curve inversion in the Eurozone amid elevated recession risk. Banks typically borrow at short-term rates and lend longer term. Thus, Deutsche could run into trouble if yield curves do not steepen soon. Furthermore, Deutsche Bank’s stock possesses technical concerns. The asset has surged by nearly 30% since we last covered it in October, partially justified by a sharp recovery in European equities and the stock’s high beta coefficient of 1.43x. Nonetheless, one has to wonder whether numerous investors will take profits after Deutsche Bank’s latest earnings miss. Final Word Deutsche Bank’s fourth-quarter earnings miss raises a few concerns, especially as the stock has surged during the past few months, advancing past its cyclical valuation threshold. However, we reaffirm our buy rating on Deutsche Bank, as we believe that recovering European stock markets and supportive interest rates will ignite the bank’s broad-based income. Moreover, Deutsche Bank’s held for trading assets could rebound this year, adding substance to the firm’s tangible book value. Although risks such as inverted yield curves in Europe, dividend uncertainty, and lower Level 1 asset aggregation exist, we are willing to bet that Deutsche Bank will experience extended gains in the coming quarters.
