Beating 2012’s company projections of financial revival by 2015, shares of Deutsche Bank (DB, Financial) continue to fall, with the aggregate fall in the last 12 months amounting to a massive 35%. The decline, seen to be the result of soaring litigation costs coupled with reduced trading returns, is allegedly the biggest amongst major investment banks across the globe. Deutsche Bank is currently valued at around $39.1 billion, earning the company the dubious status of being the lowest valued bank among the top nine international investment banks. The bank’s current value leaves nothing for investors to cheer about.
Tough Times Call for Tough Decisions
In 2013 and 2014, Deutsche Bank tapped investors for around $12.5 billion, aiming to lift fund and capital growth. The company subsequently increased the mean active equity at its securities arm by 18% to around $23.7 billion during the first three quarters of 2014. However, the company saw a 2% slide in revenue from trading currencies and fixed income over the same period, indicating that it is increasingly getting squeezed and would require more capital to target growth.
While the company has announced a strategic review to examine profit targets as well as its business lines, industry experts feel the situation calls for deeper-than-planned cuts into its securities unit. According to company data, Deutsche Bank’s balance sheet for its securities arms declined by 17% to $1.2 trillion between the end of 2012 and September 2014. However, this cut is much lower compared to Barclays (BCS, Financial), which expects to shrink its investment banking arm by 46%, or Standard Chartered PLC (SCBFF, Financial), which announced plans to cut $40 million in costs through elimination of equities trading and about 4,000 consumer banking jobs.
Experts believe that the leading German lender would do well to enhance its capital returns and ratios by cutting down on its interest-rate business, scaling down in credit trading and holding a smaller number of assets for hedge funds. As part of a review of the capital requisites and profitability of the company’s investment bank, Deutsche Bank is currently identifying individual trading ventures to exit while also considering job cuts. According to unconfirmed reports, the company is also considering offloading some of its assets, including the sale of its Postbank-branded retail unit, while taking steps towards expanding the company’s other ventures.
Not surprisingly, investors are shying away from Deutsche Bank stocks and are waiting for the company to make the right strategic moves to lift it from the current crisis. However, while some experts recommend that investors sell their shares, others feel that the low valuations makes Deutsche Bank an attractive investment option citing that the risk-reward for Europe’s cheapest bank would be quite favourable on a price-to-returns basis.
Redeeming Factors
In spite of its overall dim outlook, the Deutsche Bank topped rankings in the worldwide fixed income market in 2014 due to gains in investment grade corporate bonds and government bonds, surpassing rivals Barclays and Citigroup (C, Financial). The company grew its market share in the fixed income segment to 10.1% (an increase of 10 basis points) to rank top for the fifth consecutive year, with Citigroup and Barclays posting a 9.6% and 9.4% growth respectively. Further, the German bank also improved its market share within the US, which is the largest global fixed income market, by 80 basis points to tie for first rank. At the same time, the company’s units for management of funds and wealth increased their respective assets by 9.3% to over $1 trillion in 2014, helping the company strike a realistic balance in its businesses.
Final Thoughts
The immediate future holds no reprieve for Deutsche Bank, with factors such as new regulations, low rates of interest and a mixed economic outlook for European markets continuing to affect the company’s business. Moreover, 2015 could prove to be a challenging year for European investment bank returns in general, with industry experts predicting a 4% decline in incomes from trading commodities, currencies and fixed income. The German bank’s revenue outlook for the current year is bleak, and a potential upswing in its fortunes hinges on the scale of restructuring the company would undertake as it refreshes its strategy by June end. The company’s only redeeming feature at the moment is its fixed-income business that is capable of generating revenue above its equity costs, allowing the company adequate funds to cover the cost of fines, legal settlements and the upshot of regulation.
