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Hope for Deutsche Bank’s share price despite German recession fears?

Deutsche Bank’s share price jumped by 3% from 23 August to 30 August, bringing total gains for the second half of August to 13%, despite it being a particularly trying week for the firm. 

At first it was revealed that it would pay a $16m fine to US authorities over allegations that it hired unqualified relatives of Russian and Chinese government officials to win business – a cost the flailing bank could have done without. Within the same week, it was also subpoenaed by two US congressional committees to turn over a vast array of records relating to its ongoing business with President Donald Trump.

The news of recent scandals arrives as the German government struggles to stave off a recession. “If the economy enters into a recession, the banks are the first to get hit,” Danyal Bayaz, a German Green party lawmaker on the lower house finance committee, told Bloomberg. 

Deutsche Bank [DBK] has had a tough year: it’s share price remains 32% down over 12 months (up from 40% down on 15 August) and further controversy would seem unlikely to aid its slumping performance. So what’s driving optimism?

 

Achleitner eyes a successor, strikes deal with BNP Paribas

At a glance, the bank’s shares began to rise on 15 August, after it was revealed that supervisory board chairman Paul Achleitner is searching for his successor. 

The search is said to be in response to shareholder criticism about succession planning, according to Bloomberg which first reported the story, although Achleitner intends to complete his term which expires in 2022. 

“If the economy enters into a recession, the banks are the first to get hit” - Danyal Bayaz

Achleitner has been an unpopular leader among shareholders in the past few months, after he embarked on a series of unsuccessful turnaround efforts that have caused the bank’s share price to plummet.

A potential deal with BNP Paribas [BNP] may also be bolstering gains. On 23 August, it was reported by the FT that the bank is to transfer up to 800 staff from its investment banking business to the French lender. Deutsche Bank has emphasised plans to cut staff and streamline its business in an effort to cut costs, so the news would have been welcomed by shareholders.

 

Not in the clear 

Despite recent gains however, it could be difficult for the bank to hold onto positive momentum in the near future. 

Zacks Investments Research, which lowered shares of Deutsche Bank from a ‘hold’ rating to a ‘sell’ rating on 12 August, said: “On the NYSE, shares of Deutsche Bank have underperformed the industry over the past six months. Second-quarter results were impacted by significant restructuring costs, rise in provisions and lower revenues. 

“Litigation issues related to past misconducts continue, and legal costs might deter bottom-line growth to some extent. Also, declining fee income and pressure on margins due to low interest rates in the domestic economy, keep the top line under pressure.”

It is unlikely that such issues are to be resolved in the short-term. The bank currently has a price-to-earnings ratio of 710.31, according to data from Morningstar, pointing to the company’s bottom line deficiencies relative to the company’s market valuation.

 

Market cap 13.29bn
Operating margin (TTM) 4.96%
EPS (TTM) -1.69
Profit margin -13.61%

Deutsche Bank share price vitals, Yahoo finance, 3 September 2019

 

In a show of confidence however, CEO Christian Sewing revealed this week that he will be investing 15% of his net salary into shares of the company each month, starting 30 August.

 

Consensus

Despite Sewing’s move, few analysts share his confidence in the stock. Of 25 analysts tracked by Reuters, just one lists the firm as a ‘buy’. Consensus sits at ‘underperform’, with 11 analysts rating the stock as a ‘hold’, 9 as ‘underperform’ and 4 as a ‘sell’.

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