Deutsche Bank Earnings: Investment Bank Returns and Capital Intensity Are Difficult To Justify

Deutsche Bank DBK reported second-quarter profit before tax of EUR 1,405 million, slightly behind the same quarter a year ago (EUR 1,547 million). The quarter was good, nonetheless. Deutsche Bank showed good growth in the corporate and private bank, two segments that are core to Deutsche’s strategy if it wants to reduce its exposure to the often volatile investment banking business. The latter saw revenues decline 11% in the quarter, largely driven by lower revenues in rates, foreign exchange, and emerging markets. We maintain our EUR 12.90 per share fair value estimate and no-moat rating for Deutsche Bank.

The corporate bank benefited primarily from higher net interest income lifting performance across its subsegments, increasing revenues for the entire segment by 25%. Deutsche also noted a EUR 2 billion inflow of deposits during the quarter—a welcome sight for Deutsche and its goal to rebuild its corporate banks’ franchise value. The private bank also saw higher interest rates lift net interest margins, driving revenues up 11%. Asset-management revenues declined 6% primarily on lower asset under management levels filtering through to fees collected.

The performance in the investment bank can be presented as good given the overall slowdown in volatility and activity levels versus a very strong 2022. That said, a return on tangible equity of 5.3% in the quarter, even if that falls toward the lower end of a normalized environment, is dragging on profitability significantly. Nearly half of risk-weighted assets are committed to the investment bank, which in a good year such as 2022 did not cover the group’s cost of capital. As such, we would like to see a greater shift away from investment banking activities, freeing up more capital to be redeployed into asset-light businesses.