Why We Cut Our Price Estimate For Deutsche Bank To $9
Deutsche Bank (NYSE:DB) stands out among the world’s largest banks as the only one to see its share price fall steadily since 2009. To put things in perspective, the bank’s shares have sunk from over $60 in September 2009 to below $8 in December 2018. This steep decline is easy to explain, given that the German banking giant has yet to fully recover from the impact of the downturn, as well as the long list of high-profile lawsuits it has found itself entangled in over subsequent years.
Deutsche Bank’s troubles are still not over. The biggest issue plaguing the bank is its elevated expense base – something that can be attributed to a large extent to its ill-fated acquisition of Postbank. Notably, the bank’s primary goal in the four large-scale reorganization plans it has announced in the last three years has been to cut costs. And while it has done fairly well on this front, the accompanying reduction in the top line, coupled with revenue headwinds expected across its operating divisions, do not bode well for the bank. As we detail in our interactive valuation dashboard for Deutsche Bank, we estimate the fair value for the bank’s shares at $9 – slightly ahead of the current market price. Additionally, you can access all Trefis data about Banks here. Below we discuss the key factors impacting our price estimate for Deutsche Bank.
Deutsche Bank Is Facing Sizable Revenue Headwinds Across Divisions
At first glance, Deutsche Bank’s revamped business model largely resembles those of HSBC and Citigroup, with the exception that Deutsche Bank’s retail and commercial banking efforts are geographically focused primarily in Europe, as opposed to the significant geographical diversification for the other two banks. All these banks have a strong presence in the global FICC trading industry, and have shrunk their equity trading desks since the downturn. Overall this is a well-balanced business model for stable, long-term growth.
However, the uncertainty surrounding Brexit has had a visible impact on the economy of the Euro region. This will continue to have a negative impact on Deutsche Bank’s retail and commercial banking operations, as the steady decline in market share for Deutsche Bank in securities trading hurts the top line. Deutsche Bank’s decision to scale back its trading business – coupled with its loss of favor with securities trading clients – resulted in the bank falling to the #8 rank globally in terms of forex trading market share in 2018, from being the market leader less than a decade earlier.
Moreover, secular headwinds in the asset management industry from the growing popularity of low-cost ETFs also resulted in Deutsche Bank’s asset management arm reporting net outflows in each of the four quarters in 2018 – leading to total outflows of €23 billion for the year. We expect revenues for the asset management division to remain depressed in the near future due to this ongoing trend.
Potential Merger With Commerzbank
Deutsche Bank’s latest reorganization plan included a return on tangible equity (RoTE) target of 10% by 2021 – a figure well below what its peers report. For perspective, the largest U.S. bank, JPMorgan Chase, reported an RoTE figure of over 14% for full-year 2018. The fact that Deutsche Bank aims to achieve this modest target only after three years indicates that the bank’s progress in achieving reasonable returns for investors will likely remain slow.
Under these circumstances, the growing possibility of a merger with Commerzbank is bound to further slow down Deutsche Bank’s recovery. While a merger between the largest and second-largest German banks can potentially add value in the long run, it should be noted that Commerzbank is in a weaker financial position than Deutsche Bank (with the German government holding a 15% stake in it since its bailout in early 2009). Additionally, Germany’s fragmented banking industry means that a merger cannot unlock any revenue synergies – the gains will have to come purely from cutting costs. Given the track record of both banks in this field, a merger would inevitably lead to significant losses from one-time reorganization and merger costs for several years before being accretive to earnings.
We expect Deutsche Bank’s adjusted EPS for full-year 2019 to be around €0.71. Using this figure with our estimated P/E ratio of 11, this works out to a price estimate of $9 for Deutsche Bank’s shares (assuming a EUR-USD exchange rate of 1.15).
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