A Cautious Tone for Deutsche Bank

“Deutsche Bank, Germany’s biggest bank, says second quarter profit rose 68%, beating estimates. Net income rose $1.55 billion, this is a huge however, the bank has been forced to increase its provision for bad loans to $1.4 billion. Deutsche Bank is posting second straight quarterly profit after reporting its first annual loss in 50 years. Those bad loans provisions spooking the market. Deutsche Bank stock down 9% and that is the latest in Europe.” Fox Business Money for Breakfast 7/28/2009

Investment banking trading revenue allowed the largest German Bank to exceed profit estimates, but Deutsche Bank (NYSE:DB) continues to deleverage and hold more capital in reserve for losses. Shares of Deutsche Bank AG are trading down more than11% in early afternoon trading, as the market was surprised by the larger than expected ramp up in loan loss reserves. Earnings were 68% better than a year ago, coming in at 1.09 billion euros ($1.56 billion) versus 649 billion euros last year. Furthermore, revenue gained 46% from a year ago, boosted by strong investment banking results, which was due in part to European companies 12% increase in offerings of corporate bonds. Of course, the CEO emphasized that Deutsche Bank will be heavily influenced by the progress in the overall economy, and he stressed that the company is taking steps to prepare for an uncertain environment.

The take away from the Deutsche Bank earnings release seems to be the much larger than expected bolstering of loan loss reserves. The company increased its provisions for credit losses to 1 billion euro, up nearly 700% from the level last year of 135 million euro. The total amount of cushion against soured loans was 36% greater than the consensus analysts estimates for the reserve of 634 million. This projects a couple of things to the market that are scaring investors. First, this suggests that the credit situation in Europe may be more risky than the analysts had thought with the bank’s drastic increase in reserves. The bank reported that problem loans doubled in this quarter from a year ago, tallying more than 8 billion euros in loan amount. Secondly, the bank is sending a cautious signal rather than an aggressive one, as the company is storing more capital away for a rainy day instead of actively trying to place in a venture with growth potential.

This earnings release does nothing to sway us from our Overvalued stance on Deutsche Bank at this time. We continue to believe that financial stocks are extremely vulnerable and have advanced too fast in our opinion to warrant the current price tag. For example, DB has more than tripled over the last six months coming into the day. Of course, capital markets looks stronger than they did six months ago, but there are still significant headwinds that may challenge the green shoots. As today’s earnings release demonstrates, credit concerns still necessitate fortification of their balance sheet. We will continue advising investors to steer clear of Deutsche Bank for the time being because the recent economic improvements are still vulnerable and the actions of the company do not inspire a lot of confidence in the immediate future.

A Cautious Tone for Deutsche Bank

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