Deutsche Bank (NYSE:DB) saw its shares gain nearly 8% over trading yesterday when investors saw the prospects for the largest German bank in 2012 improve considerably following an unexpected improvement in the country’s business climate index.  The strength of the German economy was further reinforced by the country reporting the lowest unemployment figures in nearly two decades. With things not looking so grim anymore for the entire European Union, global markets rallied yesterday, with bank stocks benefiting most. Shares of all major banks gained more than 3% at Wall Street over trading, with those for Barclays (NYSE:BCS) rising more than 7% followed by a near 5% boost for BNY Mellon (NYSE:BK), JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC). Deutsche Bank’s shares got an additional boost from the news that it settled its $217 million lawsuit with Akamai (NASDAQ:AKAM). 
We maintain a $48 price estimate for Deutsche Bank’s stock, and believe that the 26% premium over current market prices can be attributed to the extremely pessimistic sentiment among investors towards banks in wake of the deteriorating debt situation in Europe.
Germany is Still Going Strong
The German business climate index, compiled by the Ifo institute, is an indicator of the prevailing sentiment among German executives about the country’s business environment over the short- and medium- terms.  The improvement in the index for the second month in December has kindled hopes that the largest European economy will be able to emerge largely unscathed from the tough economic environment predicted for 2012. The low unemployment rates for the country have also kept consumer sentiments up in Germany.
And The ECB Seems to Be Doing Its Bit
The European Central Bank (ECB), which dampened spirits across the globe with its decision to refrain from buying any more European debt at least for the time being, did well to cut benchmark interest rates to a record low of 1%.  It also announced its decision to hand out three-year unlimited loans to banks in the region. This move is expected to reduce the funding pressure on banks, which in turn should keep the wheels of EU economies turning.
Deutsche Bank Also had Some Action of its Own
Yesterday, Akamai agreed to settle the $217 million lawsuit it had filed against Deutsche Bank last February.  In the lawsuit, Akamai alleged that Deutsche Bank wrongfully invested this amount in auction rate securities (ARS). The details of the settlement, including the settlement amount, have not been disclosed. The settlement is expected to have a negligible impact on the bank’s sales & trading margins for this year.Notes:
- German Business Confidence Rises as Nation Set to Avoid Recession: Economy, Bloomberg, Dec 20 2011 [↩] [↩] [↩]
- Akamai, Deutsche Bank Settle $217M Suit Over ARS, Law360, Dec 20 2011 [↩] [↩]