Trading Ban in South Korea Has Little Impact on DB Stock, Regulatory Overhang Lingers

March 1st, 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 corporate, government, financial institutions, private and business clients globally. 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).

We estimate that the sales & trading division constitutes around 24% of our $54.80 price estimate for Deutsche Bank’s stock, which is around 15% below the current market price. The bank’s sales & trading revenues increased by 2% in 2010. [1]

Deutsche Bank Suffers Heavy Penalty from Korean Regulator

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However, Deutsche Bank is facing regulatory charges on its brokerage business in Korea and accusing it of market manipulation. On November 11 last year, the first day of the Group of 20 summit meeting, the Kospi 200 fell by 2.79% in the closing minutes wiping out $26 billion in value. Deutsche Bank was a major participant on the exchange that day selling $2.2 billion worth of stock that was tied to the value of a basket of derivatives. South Korea’s Financial Services Commission (FSC) announced that the bank would have to suspend its securities and derivatives trading for six months starting in April, the heaviest penalty ever imposed on a financial firm in South Korea. [2]

This is blow to Deutsche Bank’s ambitions in the Asia-Pacific region excluding Japan, where it wants to raise revenues to around €4 billion by 2011 from around €2.1 billion in 2008, mainly by focusing on organic growth. [3] Though this is unlikely to impact revenues globally, greater regulatory scrutiny could weigh on the business in both in Korea and elsewhere.

We forecast earnings for the equity division by looking at the assets deployed for trading and an estimated yield on these businesses. For the equity division we forecast this yield should reach around 2.6% and remain stable through the forecast period. We estimate that trading assets deployed will recover from around $150 billion to around $180 billion by 2014. If the yield on these assets declines to around 2% on greater regulatory scrutiny, especially on higher margin businesses like derivatives, this reduces our price estimate by about 2%.

See our full analysis for Deutsche Bank.

Notes:

  1. Deutsche Bank Reports 4Q and Full Year Results [↩]
  2. South Korea Opens Deutsche Bank Inquiry [↩]
  3. Deutsche Bank Korea clash dismissed by analysts [↩]