Encouraging Trends in Equity Trading for Deutsche Bank, But We Remain Bearish

January 25th, 2011 by Trefis Team
-19.05%
Downside
15.91
Market
12.88
Trefis
DB: Deutsche Bank logo
DB
Deutsche Bank

Deutsche Bank (NYSE:DB) is a leading global investment bank headquartered in Frankfurt, Germany. The bank offers financial products and services for a variety of global clients including corporations, governments, financial institutions. It competes with other global investment banks like Credit Suisse (NYSE:CS), UBS (NYSE:UBS), JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS).

Our price estimate for Deutsche Bank’s stock stands at $54.80, around 10% below the current market price, with the sales & trading division constituting around 24% of this value. Sales & trading includes trading of bonds, currencies & commodities as well as equities. Through its equity trading operations, Deutsche Bank generates revenue from both making markets for clients as well as from placing proprietary bets.

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Deutsche Bank’s Trading Assets for Equities

Trading assets for equities is highly dependent on the performance of the financial services sector, and capital markets in particular. Since this asset base is marked-to-market, it is subject to sharp fluctuations.

The value of Deutsche Bank’s trading assets for equities declined from around $280 billion in 2006 to around $130 billion in 2009, largely due to declining liquidity and trading volumes during the economic downturn. As the economic environment improves, we expect this to increase at an annual growth rate of around 7.5%, reaching around $230 billion by the end of our forecast period.

Though 2010 was volatile, many experts believe that 2011 will be a good year for the stocks, with corporate profits being driven by rising consumer confidence and low interest rates. In a survey by Barron’s, 10 leading strategists and investment managers indicated roughly 10% improvement in the S&P 500 this year (with estimates ranging from 7% to 17% improvement).  [1]

An AAII Investor Sentiment Survey also indicates that retail investors are becoming more bullish in 2011, after being a bit cautious in 2010. [2]

Further, analysts at Deutsche Bank expect stock ETFs to perform better than fixed income and commodities ETFs, stating that global stock ETF inflows could reach a record $200 billion in 2011, with worldwide ETF assets growing by around 30% to $1.33 trillion. [3]

We expect these factors to help increase volumes as well as returns across equities markets, which can provide an upside to our forecast for Deutsche Bank. To highlight the firm’s sensitivity to this metric, we estimate that, should its trading assets for equities increases at an annual growth rate of 13% (vs. our 7.5% base estimate) and reach $350 billion by the end of our forecast period, it would imply 4% upside to our $54.80 price estimate for Deutsche Bank.

See our full analysis for Deutsche Bank here.

Notes:
  1. Barron’s: Outlook 2011, December 20, 2010 [↩]
  2. AAII: Investor Sentiment Survey, January 19, 2011 [↩]
  3. Deutsche Bank: ETF Assets To Grow By 30% To $1.3 trillion This Year [↩]