Deutsche Bank’s [DBK] share price was €8.55 as of 2 July’s close. That puts it 16.2% below its most recent peak of €10.20 in February, but 75.6% higher than its year-to-date low of €4.87, to which it fell during March’s coronavirus market sell-off.
Since the start of the year, Deutsche Bank’s share price is up 16.33%. In comparison, HSBC [HSBA] has slumped 34.6%, Société Générale [GLE] is down 51.04% and Commerzbank [CBK] has fallen 29.66% (through 3 July’s close).
In fact, Deutsche Bank’s share price performance led The Wall Street Journal to recently declare it “good enough to handily outstrip the share performance of big profitable U.S. banks like JPMorgan Chase & Co and Goldman Sachs”.
As the Journal notes, Deutsche has become the world’s best performing large bank stock in recent months, but how sustainable is this position?
Banks were amongst the hardest hit in the wake of March’s coronavirus market sell-off and, while many have recovered slightly, the extent of Deutsche Bank’s share price recuperation has been grabbing headlines in recent months.
To understand why it’s become one of the world’s best-performing lenders, let’s take a look back at last year.
A radical transformation for Deutsche Bank’s share price
In July 2019, Deutsche Bank announced proposals for a major business overhaul. This included a radical reorganisation blueprint and plans to cut 18,000 jobs over three years. The plan came in response to a significant period of declining revenue and rising capital costs, which saw Deutsche bank’s share price steadily drop through 2018 and the first half of 2019.
The bank has also had its fair share of technological woes. At the end of last year, Deutsche unveiled a multi-billion euro innovation strategy to transform its banking systems. This plan included migration to Microsoft Azure cloud — Deutsche claimed to be the first and only financial services firm to do be making such a move. Since beginning to transfer, the bank has acknowledged that making the transition won’t be an overnight process. It has also conceded that investment in its legacy systems will need to continue in the near-term.
Number of jobs Deutsche Bank plans to cut over 3 years
Other short-term pay-outs have been noted, but the bank remains confident that the business restructuring will ultimately reduce costs and deliver consistent profits in the long-term.
The bank’s Q4 2019 earnings report announced a €1.5bn loss in the last three months of the fiscal year, down 262.6% in the same quarter last year. It reported full-year net losses of €5.3bn, compared to profits of €341 million the previous year, stating this was “entirely driven by transformation-related effects.” Analysts had been expecting losses of €1bn and €5.1bn respectively, according to CNBC. Revenue for Q4 2019 was down 4% at €5.35bn, but beat expectations of €5.28bn.
It wasn’t all doom and gloom however; despite the losses, investors responded positively to the quarterly report. Deutsche Bank’s share price rose 6% on 6 January based on hopes that the business transformation and restructuring would pay off.
For Q1 2020, Deutsche Bank reported an income of €66m, a 67% decrease on Q1 2019’s income of €201m. Revenue remained unchanged year-over-year at €6.35bn. The provision for credit losses increased 261.4% since the same quarter in 2019 to €506 million — this can largely be attributed to coronavirus measures. Earnings per share were €0.02.
Deutsche Bank's Q1 income - a 67% YoY drop
Deutsche Bank’s share price and analyst scepticism
Once again, investors responded positively to the Q1 results, and Deutsche Bank’s share price was up 12% through 29 April’s close. The longer-term outlook, however, is less optimistic.
Reports suggest that there could be further and deeper losses to come this year, which could well see Deutsche Bank’s share price dive once again. Analysts expect fiscal year losses of €1.8bn — which, if accurate, would mean a sixth consecutive annual loss, according to the Financial Times.
In March, credit ratings agency Fitch downgraded the bank to BBB and affirmed this rating in May.
“The rating affirmation reflects our expectation that the bank will continue to make progress with its strategic turnaround despite additional challenges arising from the coronavirus crisis,” the agency said in a statement.
“However, we continue to see medium-term risks to Deutsche Bank’s strategy and financial profile in view of the weak economic outlook.”
“However, we continue to see medium-term risks to Deutsche Bank’s strategy and financial profile in view of the weak economic outlook” - credit ratings agency Fitch
This prognosis is mirrored in the opinion of analysts polled on MarketScreener, who suggest that Deutsche Bank “is among those businesses with the lowest growth prospects”. This news should not come as a surprise to investors, however, as the bank warned back in December that they should not expect notable growth in capital until 2022, according to the Financial Times.
Zacks Equity Research concedes that Deutsche Bank’s cost-control efforts and plans to strengthen its capital position “will likely lend support”, but insists that “persistent margin pressure and involvement in legal matters might offset the positives to some extent”. Zacks’ consensus estimate for the current year loss has widened to 41 cents from 31 cents over the last 60 days.
The consensus rating among 15 Wall Street analysts polled by MarketBeat is a sell. This rating is held by nine analysts, while the remaining six rate the stock a hold. The average twelve-month target for Deutsche Bank’s share price is €5.97, which would represent a 30.2% drop on the current price through 2 July’s close.