Investing.com -- Shares of Deutsche Bank AG (ETR:DBKGn) (NYSE:DB) were down on Wednesday after its third-quarter results posted an increase in loan losses, surpassing market expectations.
At 3:12 am (0712 GMT), Deutsche Bank AG was trading 4.8% lower at €15.530.
“While the increase in loan losses in Q3 is disappointing although not totally unexpected, we believe it is a reflection of the environment rather than company specific,” said analysts from RBC (TSX:RY) Capital Markets in a note.
Deutsche Bank’s loan loss charges came in at €494 million, exceeding the €441 million forecast by analysts.
This increase in provisions was primarily driven by higher Stage 3 provisions, which rose to €482 million, reflecting challenges in specific portfolios, including commercial real estate and Postbank integration costs.
Despite the elevated provisions, Deutsche Bank reiterated its capital distribution plan, signaling confidence that these headwinds will not derail its broader financial targets.
The bank reported a third-quarter net profit of €1.633 billion, surpassing the consensus estimate of €1.523 billion. Pre-tax profit was also higher than expected at €2.262 billion.
Underlying pre-provision profit exceeded expectations by 6%, with revenues from its core divisions coming in 2% higher than anticipated.
Despite this, there was some softness in the corporate and private banking divisions, with corporate bank revenues falling 3% year-on-year, largely due to shrinking deposit margins. Loan volumes also declined by 1% across both corporate and private banking segments.
In contrast, the investment bank delivered strong results, with revenues up 11% year-on-year, driven by robust performance in fixed income and origination and advisory fees, which surged 24%.
This marked a beat compared to the U.S. peers, which saw O&A fees rise by 31% during the same period.
The bank’s management expressed optimism for the investment bank's pipeline heading into the fourth quarter, suggesting that momentum could continue, even as the banking book’s net interest income remained flat.
Analysts at RBC Capital Markets note that Deutsche Bank’s performance in investment banking offset some of the revenue pressures in other segments.
However, they flag that the increased loan losses would likely weigh on investor sentiment, particularly given the bank's exposure to commercial real estate.
Despite this, Deutsche Bank remains on track with its revenue guidance for 2024, maintaining expectations of €30 billion in revenues, bolstered by investment banking strength and the expectation of higher asset management revenues.
On the capital front, Deutsche Bank’s CET1 ratio—a key measure of financial strength—stood at 13.8%, slightly above the 13.7% consensus.
The bank continues to make progress on risk-weighted asset optimization, with €22 billion in reductions so far, leaving room for further measures as it targets €25-30 billion by 2025. Deutsche Bank has also applied for authorization for a share buyback, with management signaling a commitment to outperform its previous €8 billion capital distribution target across 2024-2025.
Deutsche Bank revised its loan loss guidance for 2024 upwards to €1.8 billion, reflecting the ongoing challenges from the Postbank integration and two larger corporate credit events.
Despite this, the bank expects loan loss provisions to normalize by 2025, with consensus estimates pointing to €1.457 billion in provisions next year.
Analysts at RBC believe that while elevated credit losses in the near term are a concern, the longer-term outlook remains intact, particularly with the bank targeting a return on tangible equity (ROTE) of over 10% by 2025, compared to a consensus estimate of 8.8%.
Litigation remains a key issue for Deutsche Bank, particularly related to the ongoing Postbank case.
A ruling from the Cologne court is expected soon, although the impact may not be immediately clear. Deutsche Bank has already settled with several claimants, covering 60% of the total claims, but further legal battles remain, which could weigh on the bank’s outlook.