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Deutsche Bank's Profitability at Risk from Macro Concerns

On Aug 10, 2016, we issued an updated research report on Deutsche Bank AG DB. The backdrop has been tough for global banks since the beginning of the year. Concerns over the Chinese economic slowdown, continued volatility in commodity prices and the prevailing low and sometimes even negative interest rate environment have taken a huge toll on the industry.

The industry wide weakness and global concerns were further fueled by the Brexit referendum which adversely impacted the bank stocks.  Notably, year to date, Deutsche bank lost more than 40% on the NYSE.

Last month the German banking giant reported net income of €20 million ($22.6 million) for the second quarter of 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), down 66.8% year over year. Results were adversely impacted by reduced revenues and higher provisions, partially offset by lower expenses which resulted from reduced litigation as well as compensation costs.

DEUTSCHE BK AG Price

DEUTSCHE BK AG Price | DEUTSCHE BK AG Quote


Profitability growth of Deutsche Bank , one of the  largest financial institutions in Europe and the world, as measured by total assets (€1.80 trillion as of Jun 30, 2016),  remains threatened by a stressed operating environment with negative interest rates, slow growth of the European economy and global headwinds.  Management continues to see a challenging revenue environment in 2016, specially post Brexit vote.

Further, legal woes seem to be never ending for Deutsche Bank. Though the company expects to settle significant cases this year, litigation headwinds are not likely to ease any time soon as the bank continues to struggle with numerous lawsuits and regulatory proceedings in and outside Germany. Consequently, the company's financials remain exposed to potentially high legal expenses.

However, on the brighter side, company is expediting its Strategy 2020 efforts to revamp the bank with focus on simplifying the bank’s business model, reducing costs and shedding unprofitable businesses. Notably, the company is making progress in several areas including boosting of capital strength, reorganizing its investment banking and retail businesses and greater digitization. Gradual achievements in the strategy should support bottom-line expansion.

Over the past 30 days, Zacks Consensus Estimate declined 71% to 40 cents per GRS for 2016 and decreased 9.5% to $2.00 per GRS for 2017.

Deutsche Bank currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the foreign banks space include KB Financial Group, Inc. KB, Sumitomo Mitsui Financial Group, Inc. SMFG and Australia & New Zealand Banking Group Limited ANZBY. Both KB Financial and Sumitomo Mitsui sport a Zacks Rank #1 (Strong Buy) while Australia & New Zealand Banking carries a Zacks Rank #2 (Buy).

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DEUTSCHE BK AG (DB): Free Stock Analysis Report
 
AUST&NZ BKG-ADR (ANZBY): Free Stock Analysis Report
 
KB FINL GRP-ADR (KB): Free Stock Analysis Report
 
SUMITOMO-MITSUI (SMFG): Free Stock Analysis Report
 
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