Late last week, Deutsche Bank (NYSE:DB) successfully completed the first official cross-border yuan payment transaction under the pilot program launched to allow companies to settle trades in the Chinese currency.  The program, which is a brain-child of the People’s Bank of China, seeks to make cross-border trade in the yuan significantly quicker and represents a huge revenue potential for global banks with an established global transaction services business like Deutsche Bank, Citigroup (NYSE:C) and RBS (NYSE:RBS).
We maintain a $49 price estimate for Deutsche Bank’s stock, which is almost 40% above the current market price. The negative market sentiment towards bank stocks, and European banks in particular, are largely responsible for the significantly depressed share price.
China, the world’s second largest economy, is looking for ways to promote the use of the yuan globally – something that is seen as a necessity to ensure continued growth in local businesses for the export-driven economy. Settling of trades in the Chinese currency is hence an important step forward.
The People’s Bank of China is ushering in this change, with the pilot program launched by its Shanghai branch.  Under this program, a list of companies have been exempted from the paperwork that is normally required for a Chinese firm to settle overseas payment – cutting down significantly on the cumbersome settlement process.
Deutsche Bank is among the banks that have, rather eagerly we might add, enlisted to be a part of the program. And the largest German bank’s stronghold on the foreign exchange market made it the ideal candidate to settle the first trade under the program.
So what’s in it for Deutsche Bank?
China represents a huge market for global transaction services – something that contribute to nearly a quarter of the bank’s value according to our analysis. The country is opening the door to settle trades in yuan and Deutsche Bank already has a foot in the door. It hence has a better chance than its competitors at gaining a bigger share of this new market.
Once settlements in yuan are ratified by the Chinese government, companies across the country would avail of transaction services provided by the global banks. And Deutsche Bank’s growth in the Chinese transaction services market will boost its transaction services fees – something we capture in the chart above. You can understand how a change in these fees affects Deutsche Bank’s value by making changes to this chart.Notes: