- Private & Commercial Bank constitutes 34% of the Trefis price estimate for Deutsche Bank's stock.
- Sales and Trading constitutes 28% of the Trefis price estimate for Deutsche Bank's stock.
- Global Transaction Banking constitutes 16% of the Trefis price estimate for Deutsche Bank's stock.
Latest Earnings Q1'21
Deutsche Bank reported strong performance in the fiscal first quarter, with the bank-beating the consensus estimate. Overall, the bank's revenues increased 14% y-o-y to €7.23 billion, while the bank reported a profit of €1 billion. Further, Deutsche Bank's investment banking revenues surged by 32% y-o-y led by a 34% increase in FICC trading revenues. Moreover, the bank's provisions fell by 86% from the previous quarter resulting in a significant improvement in the operating income.
Impact of Covid-19
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. Deutsche Bank’s retail business, in particular, was hit as the new loan issuance slowed down. Moreover, the bank’s provision for loans increased due to the risk of default. That said, significant growth in the investment bank division (sales & trading and investment banking) enabled the bank to post a 4% y-o-y growth in 2020. The higher growth momentum in investment bank continued in the first quarter of FY2021 as well, and we expect it to dominate the second-quarter results too.
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.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
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. However, this metric improved to 5.9% in 2019 as revenues remained stagnant while the valuation of trading assets decline. While we forecast the yield to remain around 6% 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 just -2% in 2015 due to settlement costs, while this figure improved to 10% in 2016, before settling around 4.7% at the end of 2019. 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 18% by the end of the Trefis forecast period, then this would represent upside of 12% 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.
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.
SOURCES OF VALUE
Significant asset base, high yields, and strong operating margins make FICC Trading the most valuable division for Deutsche Bank
Deutsche Bank has roughly $105 billion in debt capital deployed for trading fixed-income securities with a yield of around 6%. 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 FICC 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 $860 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 3.2% of total transaction volume from financial assets worth more than $130 billion in its Global Transaction Banking business. However, margins for the Asset & Wealth Management division are likely to remain around 23%, whereas the Global Transaction Banking division reported a margin of just 6% in 2017. This figure further declined to 4% in 2019, but we expect that it will increase gradually over the coming years and reach around 15% by the end of the Trefis forecast period.
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 the 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.