We believe there may be better places for your money than Deutsche Bank stock (NYSE: DB) at the present time. DB trades at $11 currently and it has gained 39% in value year-to-date. It traded at a pre-Covid high of $11 in February and is trading at the same level now. Also, DB stock has gained 85% from the lows of $6 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market recover to a large extent. The stock is leading the broader markets (S&P 500 is up about 60% since March lows), as investors are cautiously positive about the growth in Deutsche Bank’s revenues mainly driven by Investment Banking and Sales & Trading businesses – the bank has reported a 13% y-o-y growth in the third quarter revenues.
Deutsche Bank’s third-quarter results outperformed the consensus estimates. It could be attributed to a 47% jump in Fixed Income, Currency (FIC) sales & trading revenues, partially offset by a 5% drop in the corporate bank segment. However, as the economy inches towards normalcy, we expect the market-driven revenues to normalize in the coming months. Further, the lower interest rate environment is unlikely to see an immediate recovery, narrowing the growth prospects of the core banking business. In view of the strong rally in DB stock since late March, we believe that the stock has little room for growth in the near future. Our conclusion is based on our detailed analysis of Deutsche Bank’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
2020 Coronavirus Crisis
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 62% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here’s how DB and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of the S&P 500 index
- 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)
Deutsche Bank vs S&P 500 Performance Over 2007-08 Financial Crisis
DB stock declined from levels of around $102 in October 2007 (the pre-crisis peak) to roughly $20 in March 2009 (as the markets bottomed out), implying that the stock lost around 81% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.
However, DB recovered strongly post the 2008 crisis to about $55 in early 2010 – rising by 177% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
Deutsche Bank’s Fundamentals in Recent Years Look Strong
Deutsche Bank revenues fell 30% from $37.2 billion in 2015 to $25.9 billion in 2019. However, the company’s net loss improved from -$7.8 billion to -$6.4 billion over the same period. The revenues suffered as the bank exited businesses like equities sales & trading and scaled back its operations in the investment banking segment. Overall, its commissions & fee income declined by 25% over 2015-2019 coupled with a 95% drop in Net gains (losses) on financial assets/liabilities at fair value. The company’s Q3 2020 revenues were 13% above the year-ago period, and its EPS figure increased from -$0.46 to $0.16.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Going by the historical performance and in view of the strong rally in Deutsche Bank’s stock since late March, we believe that the stock has little room for growth in the near future.
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