Deutsche Bank Stock: Expect Buybacks to Resume in Q3 (NYSE:DB)

Deutsche Bank delivers a strong print for Q2

Deutsche Bank’s Q2 2024 results reinforce the company’s strong trading momentum, with strong Q1 performance continuing into the 3 months ended June: For the second quarter of 2024, Deutsche Bank posted revenues of €7.6 billion, slightly below €7.8 billion made in Q1 but representing a 2% increase compared to the same quarter in 2023. This brings total revenue for the first half of 2024 to €15.4 billion, keeping the bank on track to meet the full-year target of €30 billion. Within the group, Investment Banking continues to be the standout performer with 10% annual revenue growth in Q2 driven by strong results in Origination & Advisory. Fixed income and currencies remained flat. Meanwhile, while the Corporate Bank generated €1.9bn in Q2, in line with Q1, the Private Bank saw a slight drop in Q2 revenue to €2.3bn, mainly due to higher funding costs of deposits. Revenues in the asset management division increased 7% from last year, driven by higher management fees and continued flows in passive investment strategies.

On the profitability front, it’s worth noting that Deutsche Bank’s cost discipline continues to be a positive driver for earnings. In Q2, adjusted costs were maintained at EUR 5 billion, in line with the run rate set in Q1. Changing the perspective on operating income, I advise focusing on Deutsche Bank’s earnings power, excluding the one-off litigation charge related to the Postbank takeover. On that note, Deutsche Bank’s pre-tax earnings for Q2 2024, excluding the Postbank litigation provision, would be calculated by removing the impact of the litigation charge from reported pre-tax profit. According to the report from the second quarter of 2024, the bank recorded a pre-tax profit of 411 million euros. The provision for litigation related to the takeover of Postbank was 1.3 billion euros. So Deutsche Bank’s pre-tax earnings for Q2 2024, excluding the Postbank dispute, were €1.7 billion. Furthermore, excluding this one-time charge, the bank’s return on equity (RoTE) improved to 7.8% in the first half, up from 6.8% in the same period last year.

Postbank supply, a headwind in Q2…

As we pointed out in the profitability analysis, in Q2 Deutsche Bank took a €1.3 billion provision charge in connection with the 2010 takeover of Postbank. This provision was undoubtedly a major headwind to the equity story , because in the absence of this litigation fee, Deutsche Bank would likely have announced a second buyback program this year.

… But the settlement could support growth in Q3

On August 21, nearly a month after reporting its second-quarter results, Deutsche Bank made a major move toward resolving the protracted legal battle surrounding Postbank: In a press release, Deutsche Bank announced that it had reached to settlement agreements with over 80 claimants involved in post-bank takeover Litigation, addressing approximately 60% of all claims. This settlement is expected to have a positive impact on Deutsche Bank’s pre-tax profit of approximately €430 million in the third quarter of 2024 and strengthen the bank’s Tier 1 capital ratio by approximately 10 basis points. Notably, this net income and capital benefit precludes potential settlement with the remaining 40% of claimants. Indeed, it is suggested that if new settlements were reached with additional claimants, Deutsche Bank could release a further €280-300 million.

Implications for shareholder returns

In my opinion, the settlement is unexpected and surprisingly positive. Accordingly, I argue that this result should rekindle discussions about the potential for a new share buyback program in the second half of 2024. To support the claim, I point to a conversation CFO James Von Moltke had with Bloomberg , Oliver Crook reported. When Crook asked von Moltke whether a settlement of the Postbank dispute could mean a buyback program in the second half of 2024, von Moltke commented that if there was a positive outcome, “that would certainly change our position” . Indeed, following the deal, as reported by Reuters, Deutsche Bank said “Against the backdrop of this improvement in our capital plan, we will review our distribution plans and discuss them with our regulators as part of our dialogue in progress”. So overall, I’m bullish on a likely buyback announcement in 2024. If a settlement is reached with the remaining 40% of claimants, I’d expect a buyback program of ~$600M; otherwise ~$400 million.

Rating update

Following strong earnings momentum in Q2 (excluding Postbank), I am revising my EPS forecasts for DB through 2026: I now expect DB EPS for 2024, 2025 and 2026 to rise to a range of $2.15, $2.75 and $2.9, respectively. At the same time, I maintain a terminal growth rate of 2%, roughly in line with nominal global GDP growth, but lower my cost of equity to 12% – mostly as a result of de-risking based on an improving track record of sustainability, and expanding net profitability. Based on these updated EPS forecasts, we now estimate an implied fair share price of $33.

Below is also the updated sensitivity table.

Investor Takeaway

Deutsche Bank posted solid results in the second quarter, but these were overshadowed by a €1.3bn litigation provision related to its acquisition of Postbank in 2010. This provision significantly hampered management’s ability to distribute capital to shareholders . However, on August 21, almost a month after the Q2 report, Deutsche Bank made a major breakthrough in the long-running Postbank legal dispute. The bank announced settlement agreements with more than 80 claimants, addressing approximately 60% of the total claims. This settlement is expected to have a positive impact on Deutsche Bank’s financial position, strengthening its capital reserves. The unexpected resolution could open the door for a share buyback later this year, even with 40% of claims still outstanding.

Looking beyond the Postbank litigation, Deutsche Bank’s management remains confident of achieving its revenue and cost targets for 2024. The positive momentum in its business segments, particularly in Investment Banking, together with a favorable net interest income environment, positions the bank well for the coming years. On that note, Deutsche Bank’s path to meeting its 2025 targets, including a RoTE of more than 10%, looks increasingly achievable. That said, Deutsche Bank looks very undervalued – trading at a book value of 0.5x price-to-tangible value (P/TBV) and 6x price-to-earnings (P/E) ratio for 2025E. In my opinion, the fair value is about $33 per share.