How will the Deutsche Bank share price react to Q3 earnings?

Deutsche Bank’s stock has dropped this year despite posting strong quarterly profits. While it is true that macroeconomic events and the threat of recession have all weighed on equities this year, the Frankfurt-based bank has been hindered by links to one of Europe’s biggest tax fraud cases. Third quarter earnings could notch up another quarter of profits and boost investor confidence, as could a recent upgrade from rating’ agency Moody’s.

Strong quarterly earnings haven’t been enough to help Deutsche Bank’s [DBK.DE] share price this year. Inflationary pressures and the risk of recession in Europe have loomed large over Europe’s equity markets. Not helping matters is Deutsche Bank making headlines for its involvement in one of Europe’s biggest tax frauds.

Deutsche Bank’s share price has declined 21.61% this year to close Friday 21 October at €8.90. The stock hit a 52-week high of €14.64 on the 10 February before suffering a steep selloff in late February and early March. The decline in Deutsche Bank’s stock this year reflects the DAX’s own 19.86% drop over the same period.

However, since mid-October, Deutsche Bank’s share price has regained some momentum. Third quarter earnings due on Wednesday 26 October could help investor confidence, as could an European Central Bank (ECB) decision due the next day on whether to hike interest rates across the eurozone.

Deutsche Bank embroiled in tax scandal

Deutsche Bank’s Frankfurt headquarters were raided last Tuesday by police investigating one of Europe’s biggest tax frauds. The tax fraud known as the “cum-ex” scheme has cost taxpayers across Europe, with millions of euros misappropriated. The fraud works through share deals quickly made around a payout day, blurring the ownership of the stock and allowing multiple parties to  falsely reclaim tax rebates on the dividends.

The bank's involvement goes back to a period between 2006 and 2011 when it discussed reputational risk over money it had lent to companies to carry out the trades, according to Reuters.

Deutsche Bank CEO Christain Sewing has tried to improve the bank’s reputation since taking charge in 2018. And while these allegations are over a decade old, they come at an embarrassing time with the bank’s third quarter earnings coming under focus this week.

What to look for in Deutsche Bank’s third quarter

In the second quarter, Deutsche Bank delivered its eighth straight quarter of profit. It reported profit before tax of €1.5bn, up 33% year-on-year, and its highest second quarter profit since 2011. Post-tax profit was €1.2bn, up 46% year-on-year.

Net revenue was up 7% to € 6.6bn with growth across all core businesses. Notably, revenues from corporate banking were up 26% year-on-year to €1.6bn, while investment banking revenue was up 11% to €2.6bn. The bank said that corporate banking had not only benefited from interest rate changes, but also volume and fee growth.

Deutsche Bank said that revenues and profits were tracking ahead of 2011 for the first six months of the year. The bank reaffirmed its 2022 revenue guidance of €26–27bn despite what it called the “deteriorating macro economic environment”. The bank also reaffirmed its commitment to its cost cutting programme but noted cost pressures “outside its control” included higher inflation and the war in Ukraine.

Shareholders will be hoping that the bank can make nine quarters of profits when it reports earnings this week. Also watch out for the bank’s view on the current economic environment.

Interest rate hikes could help business

The day after Deutsche Bank’s earnings come out, the ECB will meet to discuss interest rates in the eurozone. Expectations are that it will increase deposit and refinancing rates by 75 basis points as it tries to contain inflation, according to a Reuters poll of 36 economists. This would bring the deposit rate to 1.5% and the refinancing rate to 2%. The ECB first raised interest rates by 50 basis points in July, followed by a jumbo 75 basis points increase in September.

Like the rest of the world, inflation has shot up in the eurozone due to supply chains recovering from the pandemic and the impact of the Russia-Ukraine conflict. In September inflation hit 10%, well above the ECB’s 2% target.

Analysts at Moody’s also cited interest rate rises as a factor in their decision to up its rating on the bank earlier in October. The ratings agency upped its long-term deposit ratings and senior unsecured debt ratings for Deutsche Bank from A2 to A1 with a stable outlook, their highest level since 2012.

“Further, recent interest-rate hikes have improved the prospects for higher returns within the bank’s core lending businesses conducted in its retail and corporate banking segments despite expectations of at least a normalisation in the cost of risk,” the analysts wrote.

Moody’s also cited Deutsche Bank's progress towards sustainable profitability and a meaningful reduction in expenses that should allow “the bank to safeguard operating leverage in times of temporarily higher inflation and, thereby, defend its regained earnings strength”.

Of the 21 analysts polled by the Financial Times, the median target on Deutsche Bank stock is €11.50, suggesting a 29.27% upside on Friday’s close .Of the 25 offering ratings, 10 have a ‘hold’ rating.