What Drove Deutsche Bank’s 3Q16 Earnings?

DB’s 3Q16 earnings surprised investors

Deutsche Bank’s (DB) profits of 278 million euros for 3Q16 were a big surprise for investors who expected it to report losses. The bank reported revenues of 7.5 billion euros, or $8.2 million, which exceeded forecasts.

As with US banks (XLF) Goldman Sachs (GS), Bank of America (BAC), and JPMorgan Chase (JPM), Deutsche Bank’s 3Q16 revenues were boosted by a strong trading business and fueled by global market volatility caused by events such as the Brexit vote.

What Drove Deutsche Bank’s 3Q16 Earnings?

Deutsche Bank (DB) raised its legal provisions slightly to 5.9 billion euros by the end of September. DB noted that it is working to reach a mortgage probe settlement with the US Department of Justice (or DOJ). In September, the DOJ asked Deutsche Bank to pay $14 billion as a settlement for its residential mortgage-backed securities investigation.

Analysts expect that any proposed settlements with the DOJ would adversely affect Deutsche Bank’s capital. During its 3Q16 earnings call, the bank ensured that it is adequately capitalized to cover potential losses and meet regulatory requirements. As such, Deutsche Bank also raised its legal provisions slightly to 5.9 billion euros, or $6.5 billion, by the end of September

Revenues and expenses

in 3Q16, Deutsche Bank’s (DB) credit and rates trading revenue and higher credit income offset weakness in its global transaction banking business, which had been affected by low interest rates.

For the quarter, non-interest expenses were 6.5 billion euros, 50% lower year-over-year. Lower litigation costs and non-recurrence of an impairment of 5.8 billion euros in goodwill primarily drove this decline.

However, costs are expected to remain significant for the bank through the rest of the year as Deutsche Bank expects to bear restructuring and severance charges of 0.3 billion–0.5 billion euros. The bank will need to settle pending litigation with the Department of Justice.