Deutsche Bank Separates Non-Core Operations And Will Take Charges In Q4
Deutsche Bank (NYSE:DB) confirmed Thursday that it has successfully completed the process of separating all its non-core operating units across its various businesses and housed them under the newly created Non-Core Operations Unit (NCOU). [1] The largest German bank had announced the unit’s creation this September as a part of Strategy 2015+, which entails organization-wide changes aimed at cutting costs, improving profitability and ensuring a sustainable business model (see Deutsche Bank Set For Complete Shake-up As Part Of ‘Strategy 2015+’). Deutsche Bank’s decision to created the NCOU follows in the footsteps of Citigroup (NYSE:C) and RBS (NYSE:RBS) who have demonstrated the benefits of using the “good bank – bad bank” model to improve focus on core businesses while being able to track divestments in non-core businesses better.
The bank also provided its outlook for the last quarter of the year, warning investors that it expects a series of “specific items to have a significant negative impact” on Q4 results.
We maintain a price estimate of $46 for Deutsche Bank’s stock, which is about 5% above the current market price. While our estimate already includes the overall expected benefits to Deutsche Bank’s value due to Strategy 2015+, we will be updating our divisional structure for the bank, seen in the chart below, to reflect the new structure after it releases its full year figures next month.
See our full analysis for Deutsche Bank
A clear idea of what Deutsche Bank wants to achieve by the creation of the NCOU division can be obtained from the financial supplements the bank released along with the announcement. [2] The restated revenue figures for FY2011 and YTD2012 are as follows:
Deutsche Bank Revenues
| (mil) | FY2011 | YTD 2012 |
| Group | €33,228 ($43,472) | €25,873 ($33,850) |
| of which Core | €32,349 ($42,322) | €24,812 ($32,462) |
| of which NCOU | €879 ($1,150) | €1,061 ($1,388) |
As seen in the table above, the NCOU contributed to about 2.6% and 3.9% of total revenues in FY2011 and YTD2012 respectively. But the story changes completely when it comes to the pre-tax income figures, shown in the table below. As the business units that have been moved to NCOU were making significant losses over recent years, Deutsche Bank’s core pre-tax income are substantially higher than the group’s total pre-tax income – a 39% increase for FY2011 and a 32% boost for YTD2012.
Deutsche Bank Pre-tax Income
| (mil) | FY2011 | YTD 2012 |
| Group | €5,390 ($7,052) | €3,966 ($5,189) |
| of which Core | €7,464 ($9,765) | €5,232 ($6,845) |
| of which NCOU | -€2,074 (-$2,713) | -€1,266 (-$1,656) |
Hence, the reclassification allows Deutsche Bank to keep its loss-making non-core operations separate from the profitable core business not only in implementation, but also on paper. The bifurcation should help Deutsche Bank focus on cutting down on the non-core businesses better, but the actual benefits on the group’s overall results can only be expected once the divestments begin. Until then, the only purpose this new division serves is to give the bank’s balance sheet and income statement a face lift, evident from the detailed risk profile of the NCOU released along with the announcement. ((Analyst Presentation, Deutsche Bank Website))
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Notes:- Deutsche Bank establishes Non-Core Operations Unit and provides outlook on 4Q2012 results, Deutsche Bank Press Releases, Dec 13 2012 [↩]
- Financial Data Supplement (1Q2011-3Q2012), restated prior period segmentation information, Deutsche Bank Website [↩]