Deutsche Bank AG's share price soared when it released a first-quarter earnings preview saying it expected profits and revenue above market expectations, but analysts see more risks for the bank later in 2020 as it absorbs the full impact of the COVID-19 pandemic.

The group's profitability and capital position were already under pressure due to its multiyear restructuring, and the economic downturn triggered by the coronavirus crisis will likely heighten the pressure this year.

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Germany's largest bank said it will post a first-quarter pretax profit of €206 million on revenues of €6.4 billion, beating the average analyst consensus forecast for a pretax loss of €269 million and revenues of €5.67 billion.

The market welcomed the news, with Deutsche Bank's share price closing nearly 13% higher at €6.14 on the Xetra electronic platform of the Frankfurt Stock Exchange April 27.

Future headwinds

The main driver was likely the revenue expectations but the outlook for both revenue and cost of risk remains uncertain, UBS equity analysts said in an April 27 note. The share price is also likely to stay "very volatile given the high beta versus the sector and the overall market," the analysts added.

Deutsche Bank's share price experienced volatile swings in April and has done so since the beginning of 2020.

The negative effects of COVID-19 on the bank's asset quality and revenues are not fully reflected in the first-quarter figures and will become more evident in later quarters, according to analysts from S&P Global Ratings.

In an April 23 report, they said they expect Deutsche Bank to post a loss for 2020 on the back of higher credit losses and weaker revenues, and despite delivering on its cost target for the year.

The group has confirmed its €19.5 billion cost target for 2020, down from €21.6 billion in 2019.

Capital

In its earnings preview, Deutsche Bank warned that its common Tier equity 1 ratio and its fully loaded leverage ratio may temporarily drop below the 2020 targets of at least 12.5% and 4.5%, respectively, as it addresses the immediate impact of the pandemic. It has hiked its first-quarter credit loss provisions to €500 million from €140 million a year earlier.

Pandemic-related measures will shave 40 basis points off the bank's first-quarter CET1 ratio, which is seen at 12.8% as of March-end, down from 13.6% as of Dec. 31, 2019.

Despite the decline, Deutsche Bank said it will be able to both support clients affected by the ongoing health crisis and maintain a strong capital position with "a significant buffer above the regulatory minimum at all times." Relaxed regulatory requirements have provided it with more capital headroom, it said, noting its first-quarter ratio is 240 basis points above the European Central Bank's current minimum requirement of 10.4%.

In terms of the CET1 ratio, Deutsche Bank has so far measured up well to European peers, ranking somewhere in the middle of the top 20 lenders by assets based on the continent. The revised outlook will put it closer to the end of the list.

The group's weaker profitability will make future capital generation more difficult, according to analysts. In a note to clients, RBC Capital Markets Equity Analyst Anke Reingen questioned the group's ability to replenish its CET1 capital due to low profits, the Financial Times reported April 27.

And despite its "fairly comfortable capitalization," its "earnings are low and currently offer modest capacity to absorb materially higher credit losses," the S&P Global Ratings analysts said.

Deutsche Bank is also more exposed than other European investment banks to risk-weighted asset spikes, and therefore to a hit to its CET1 ratio, due to the large proportion of Level 3 assets on its books, Berenberg equity analysts said in an April 17 note. Level 3 assets, which are the most illiquid and hardest-to-value financial instruments, account for more than 50% of Deutsche Bank's CET1 capital, which is the highest percentage among its peers, the analysts said.

This makes Deutsche Bank particularly vulnerable in the current capital market volatility, which "creates valuation uncertainty and scrutiny of banks' most opaque assets," the analysts said. With the CET1 ratio already expected to fall in 2020, this leaves "little room for error on capital," they said.

Deutsche Bank has the lowest Basel III leverage ratio among the 20 largest European banks. The ratio measures a bank's Tier 1 capital against its average total consolidated assets.

The bank will report earnings April 29.