Credit Suisse has slashed its estimates and price target on Deutsche Bank (DB) despite the firm’s better-than-expected Q2 results yesterday. The upside was driven, according to CS, by lower costs, which CS thinks will rise going forward. Credit Suisse is also predicting more writedowns in Q3:
Deutsche Q2 results came in above our expectations, but we are downgrading FY earnings: The variance from our expectations was a result of somewhat stronger underlying revenues, larger than expected writedowns and lower than expected costs. We believe that costs will rise in the second half and that revenues (particularly in fixed income sales & trading) will tail off. We also suspect that material further writedowns will be necessary in Q3.
Furthermore, CS believes that slightly better-than-expected results in DB’s fixed income division were the result of better forex revenue and lower rates, which CS thinks won’t sustain results in the future:
The long term revenue generating power of the fixed income franchise remains unclear: Excluding the effect of markdowns, investment banking revenues were down only 16% from Q2 07 (a record quarter). However we still believe that H1 08 performance across the board in fixed income investment banking has been bo, osted by rates and forex revenues and that the equilibrium level could be as much as 20% lower.
CS reiterates its Underperform rating, despite a cheap valuation due to the fact that they think the
“risk/reward ratio is better elsewhere.” Price target drops from 75 euros to 64 euros.
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