[Updated 09/27/2021] Deutsche Bank Valuation Update
Deutsche Bank’s stock (NYSE: DB) has gained 17% YTD, and at its current price of $13 per share, it is trading just above its fair value of 12 – Trefis’ estimate for Deutsche Bank’s valuation. The bank reported better than expected earnings in the fiscal second quarter, although its stock has made marginal gains since then. Overall, its total revenues of $7.5 billion were slightly below the year-ago period. The investment bank division suffered an 11% y-o-y drop, driven by lower debt origination and FICC (fixed income, currency, and commodity) trading revenues. However, a 14% increase in the asset management segment and some recovery in the private banking unit were able to offset the negative impact. Moreover, the bank’s provisions fell by 90% from the previous quarter resulting in a significant improvement in the profitability numbers – adjusted net income increased from -$354 million to $532 million (Note – Deutsche Bank originally reports in € (Euros), the same has been converted to USD for ease of comparison).
The company reported total revenues of $27.4 billion in 2020 – 6% above the 2019 figure. While the bank benefited from strong growth in sales & trading and investment banking business was driven by higher trading and underwriting deal volumes, it was offset by a 15% drop in net interest income (NII). Notably, the firm is heavily dependent on NII, which generates close to 50% of the total revenues. Hence, its top-line is directly affected by the changes in interest rates. Further, the first quarter 2021 results were also on similar lines.
Although the bank surpassed the expectations in the second quarter of 2021, its investment bank division, which was the main growth driver over the recent quarters, posted negative growth. Further, the NII continued to suffer in the second quarter, too. Moving forward, we expect the core banking and asset management to drive growth in the subsequent quarters, enabling Deutsche Bank’s revenues to touch $29.2 billion in FY2021 – up 6% y-o-y. Additionally, the company has seen a favorable decrease in its provisions for credit losses over the recent quarters. We expect the bank to maintain the same momentum over the coming months. It will likely improve the net income margin, leading to an adjusted net income of $1 billion and EPS of $0.48. The EPS figure coupled with a P/E multiple of just below 26x will lead to the valuation of $12.
[Updated 09/24/2021] Deutsche Bank Stock Is Likely To Trade Sideways
Deutsche Bank stock (NYSE: DB), a leading global investment bank, gained roughly 22% – increasing from about $11 at the beginning of 2020 to around $13 currently, outperforming the S&P500, which grew 14% over the same period.
There were two clear reasons for this: First, the approval of the $1.9 trillion stimulus package in the U.S. Second, the accelerated Covid-19 vaccination drive in the U.S. and Europe. Both of the above factors give weight to the forecasts of a strong economic recovery (Note – Deutsche Bank originally reports in € (Euros), the same has been converted to USD for ease of comparison).
But is this all there is to the story?
Not quite, Trefis estimates Deutsche Bank’s valuation to be around $12 per share – about 8% below the current market price – based on one key opportunity and one risk factor.
The first opportunity we see is Deutsche Bank Revenue growth over the subsequent quarters. Deutsche Bank reported full-year 2020 revenues of $27.4 billion – up 6% y-o-y, primarily driven by a 33% y-o-y growth in the investment bank segment. The division benefited from higher trading volumes and a jump in underwriting deals due to the effect of the Covid-19 crisis and the economic slowdown. While the bank posted growth in the investment bank, it suffered a 15% y-o-y drop in its net interest income (NII), which contributes around 50% of the total revenues. Notably, the NII was down due to the interest rate headwinds which reduced the net interest margin of the bank. Further, the same trend continued in the first quarter of FY2021 as well. DB reported net revenues of $8.7 billion – up 25% y-o-y, mainly driven by a 44% jump in the investment bank division, partially offset by a 6% drop in the NII. That said, growth in the investment bank is directly related to an increase in trading and underwriting deal volumes, which is expected to normalize in the following quarters. But, till that time, the division is likely to drive quarterly results. Further, Deutsche Bank’s asset management division reported a 35% y-o-y growth in the first quarter. It was driven by growth in Assets under Management (AuM), which touched $989 billion by the end of the first quarter – 9% more than the $905 billion figure at the end of 2020. Overall, we expect DB’s revenues to remain around $29.2 billion for FY2021.
Deutsche bank’s net income margin is likely to improve in 2021. The bank increased its provision for credit losses in 2020 – from $810 million to $2 billion. We expect the provisions to decrease over the coming months, with recovery in the economy. Further, the operating expenses are likely to see some reduction in the current year. Overall, this is likely to result in an EPS of $1.16, which coupled with the P/E multiple of just below 11x will lead to a valuation of around $12.
Finally, how much should the market pay per dollar of Deutsche Bank’s earnings? Well, to earn close to $1.16 per year from a bank, you’d have to deposit about $116 in a savings account today, so about 100x the desired earnings. At Deutsche Bank’s current share price of roughly $13, we are talking about a P/E multiple of just above 11x. And we think it is appropriate.
That said, banking is a risky business right now. Growth looks less promising in core banking, and near-term prospects are less than rosy. What’s behind that?
Deutsche Bank has a sizable loan portfolio and is very sensitive to a change in interest rates. It increased its provisions for credit losses in 2020 to compensate for the increased risk of loan defaults. While the provisions figure has decreased over the recent quarters, suggesting some recovery in the economy, any sudden rise in the Covid-19 cases or worsening of the economic conditions can expose DB to sizable loan defaults. Additionally, the interest rate headwinds will likely hurt the net interest margin (NIM) of the bank, negatively impacting the net interest income. To sum things up, we believe that Deutsche Bank stock is somewhat overvalued.