Market commentary: Deutsche bank earnings and the end of VW’s Piech era

Over the weekend Germany took the spot light leaving investors to assess important news related to two of its more symbolic industries: banks and autos.

On Sunday Deutsche Bank, one of the major European banks and global trading and investment houses, reported its first quarter financial results that beat analysts’ expectations and gave some breathing room to the bank’s executive management team.

Profit plunged to €544 million severely impacted by €1.5 billion legal charge, down 50% from a year earlier, but ahead of the €256 million forecasted by analysts. Revenue surged to €10.4 billion, the second-best quarter ever for the bank, supported by the investment bank division, which climbed 15%, and by fixed-income and trading that expanded 9%.

Over the first quarter of the year the bank benefited by a substantial increase in volumes mainly due to the investment opportunities created by the recent diverging monetary policies adopted by central banks around the world and that prompted investors to shift investments across different asset classes, while also pouring money into the European fixed-income markets.

Revenues form the consumer banking division were substantially flat, growing less than 1%, however the division’s pretax profit jumped 13% to €536 million thanks to expenses’ cuts and effective costs containment programs.

The bank also announced a change in its medium to long term strategy which will involve a targeted $3.8 billion costs cuts, the scaling down of the investment division, by exiting some of the 70 countries the bank has a presence in, and an extended and organised delivering program aimed to reduce the bank’s assets by as much as €150 billion by 2018.

Deutsche Bank is also planning to acquire the remaining outstanding shares it does not own in Postbank, with the intention to subsequently sell over 50% stake to the public. Given the growing profitability of Postbank, analysts believe that this operation should provide fresh cash to help Deutsche Bank financing the achievement of the its Tier1 target of 11%, the implementation of its deleveraging program and the attempt to boost its return on equity ratio.

Deutsche Bank’s shares tumbled this morning in Frankfurt, dropping as much as 5.30% in early trading, as investors digest the bank’s results, and assess the implications of legal charges and future regulatory requirements.

On Saturday, markets were also taken by surprise by the announcement that Volkswagen’s Chairman had resigned from all his appointments with immediate effect. Ferdinand Piech, one of the most prominent figures in the German and European auto industry, and undisputed authority at VW for over two decades, faced unsurmountable opposition within the Board of Directors and the Supervisory Board of the Wolfsburg-based automaker over his intention to ousting the company’s CEO.

Winterkorn, current CEO of VW and the man behind the firm’s record profit reported two weeks ago and the 26.20% stock’s run up since the beginning of the year, received full backing from the automaker, with the company’s Supervisory Board outvoting Piech 5 to 1.

After losing the battle that ended weeks of growing isolation within VW’s governing organs, the long-time Chairman decided that there was no room for reconciliation and stepped down from all appointments within the firm.

Piech will continue to influence the overall strategy of the auto giant by retaining his sit as a Board member and his 13% stake in Porsche SE holding company that controls 50.7% of VW, even though his ability to control executive decisions will no longer be wielded with undisputed authority as the company had grown accustomed to over the past 20 years.

Shares in Volkswagen jumped 3.28% at the opening of the markets this morning, as investors did not seem to be spooked by the sudden change at the helm of the automaker.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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