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Investment Overview for Deutsche Bank (NYSE:DB)

Latest Earnings

In Q4 2019, Deutsche Bank reported a net loss of €1.3 billion while net revenue slid by 4% year-over-year to €5.3 billion. However, the Core Bank, which excludes the Capital Release Unit, witnessed a 4.5% increase in revenues led by a 31% increase in FICC trading revenues, driven by robust performance in the rate business. Additionally, the bank’s adjusted costs excluding transformation charges declined by 5.5% to €5.1 billion, marking the eighth consecutive quarter of year-on-year reduction excluding bank levies. Although the bank reported higher than expected losses in 2019, the management indicated that the transformation was 70% complete, and the bank remained on course to achieve its financial targets. For fiscal 2020, we expect Deutsche Bank’s revenues to remain flat at €23 billion primarily due to a decline in trading revenues, partially offset by growth in Asset Management and Private Banking revenues.

Reorganization Plan

The new plan marks an overall shift towards more stable revenue sources. As per the new plan, Deutsche Bank will exit its Equities Trading business while retaining a focused equity capital markets operation. Additionally, the bank plans to resize its Fixed Income Trading operations - in particular its rates trading business - and will accelerate the wind-down of its existing non-strategic portfolio

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Below are key drivers of Deutsche Bank's value that present opportunities for upside or downside to the current Trefis price estimate for Deutsche Bank:

Sales & Trading

• Yield on FICC Trading Securities: Deutsche Bank's yield on fixed-income securities has averaged around 5% over the period 2009-18, with the figure swinging considerably from one year to the next as market conditions change. While we forecast the yield to remain around 4% over our forecast period, if it falls by even a single percentage point by the end of the Trefis forecast period, it would mean a downside of 4% to our price estimate.
• Investment Banking Operating Margin: Deutsche Bank's investment banking operations division's operating margin averaged below 25% between 2009-14 as a combination of weak economic conditions and large legal costs hurting profits. The figure was exceptionally low at -2% in 2015 due to settlement costs, while this figure improved to 10% in 2016, before again going down to 4% at the end of 2018. We expect margins to improve and reach around 15% by the end of our forecast period. However, if Deutsche Bank cuts costs to improve margins to 20% by the end of the Trefis forecast period then this would represent an upside of 16% to the Trefis price estimate.

For additional details, select a driver above or select a division from the interactive Trefis split for Deutsche Bank at the top of the page.

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Deutsche Bank is a leading global investment bank headquartered in Frankfurt, Germany. The largest banking group in Germany, and one of the largest banks in the world, Deutsche Bank offers financial products and services to corporates, government, financial institutions, private and business clients in 70 countries. Besides Germany and Western Europe, Deutsche Bank's growth over the years has come from the U.S. and key emerging markets in Asia.

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Significant asset base, high yields and strong operating margins make Sales & Trading the most valuable division for Deutsche Bank

Deutsche Bank has roughly $65 billion in equity capital deployed for trading purposes with a yield on capital deployed of around 3.5%, and another $125 billion in debt capital deployed for trading fixed income securities with a yield of around 5%. Although investment banking margins have been depressed over recent years due to sizable one-time expenses, the pre-tax margin figure should scale 15% in the near future. This is why sales and trading is one of the largest sources of value for Deutsche Bank.

Asset & Wealth Management business manages much more assets than the Global Transaction Banking division, but fees for the latter are substantially higher

Deutsche Bank's Assets & Wealth Management arm is another important source of value for the bank. The division manages around $800 billion in assets for clients, but earns fees that are around 0.3% of total assets under management. In comparison, Deutsche Bank earns fees of around 3.1% of total transaction volume from financial assets worth more than $140 billion in its Global Transaction Banking business. However, margins for the Asset & Wealth Management division are likely to remain around 20% whereas the Global Transaction Banking division reported a margin of just 6% in 2017. This figure further declined to 4% in 2018 but we expect that it will increase gradually over coming years and reach around 15% by the end of Trefis forecast period.

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Central Banks to keep interest rates low in the near term

The European Central Bank (ECB) is expected to leave interest rates low in the near future as the European economy gradually recovers from the global financial crisis. While the Bank of England could slash interest rates further to reduce the impact of Brexit on the British economy, the Federal Reserve is also likely to be cautious about raising benchmark interest rates in the near future.

Low interest rates would make it cheaper for people to borrow money, which would benefit Deutsche Bank by increasing demand for loans and stimulating business activities like capital-raising, as well as potentially decreasing the number of defaults on existing adjustable-rate loans. Banks can also access funds at a lower cost of capital. But on the downside, an extended low interest rate environment will continue to weigh on net interest margin figure for banks - dragging down interest incomes.

Increasing demand for investment banking services in emerging markets

With GDP and per capita income of emerging markets growing rapidly, there is an increasing demand for capital from companies in these markets to support the growing purchasing power of the people. Also with the integration of these markets with the global economy, there is a shifting trend in these countries from family-run businesses to corporations. As a result of these factors, an increasing number of companies in these markets are going public, leading to a growing demand for equity underwriting services. Additionally consolidation across different sectors is driving demand for M&A advisory services.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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