Troubled Deutsche Bank’s roughly 9 euro-per-share price tag might seem like a bargain, but the company still has plenty to prove to its investors amid a tsunami of negative news.
That was the view of some analysts after a trifecta of headlines hit the company over the last 24 hours: first, there was a downgrade from S&P Global Ratings, then news of criminal cartel charges out of Australia on Friday; and that was after reports on Thursday that the Federal Reserve had reservations about the bank’s stability.
The weight of those headlines was bad enough that Chief Executive Officer Christian Sewing released a statement on Friday leaping to the bank’s defense, though acknowledging “the news flow isn’t good.”
“It could get much worse if investors pull the plug, but really to do that there would have to be a further deterioration in trading (note the restructuring risks) or something that really blows up with the regulators,” said Neil Wilson, chief market analyst for Markets.com, in emailed comments.
What has happened?
S&P announced Friday that it will cut the bank’s long-term issuer credit rating to ‘BBB+’ from ‘A-’on the bank and its core operating subsidiaries. The troubled bank last week announced plans to cut thousands of jobs in a bid to overhaul its operations and cut costs, while shareholders demanded the resignation of Chairman Paul Achleitner.
But the ratings agency said it sees “significant execution risks in the delivery of the updated strategy amid a continued unhelpful market backdrop, and we think that, relative to peers, Deutsche Bank will remain a negative outlier for some time,” according to a statement.
Also Friday, Australia’s consumer watchdog said prosecutors will bring “criminal cartel charges against Deutsche Bank, Citigroup Inc. C, +1.15% and Australia & New Zealand Banking Group Ltd. ANZ, -1.51% over its role in underwriting a share placement.
And Deutsche Bank shares tumbled 7% on Thursday after reports the Federal Reserve secretly downgraded the bank a year ago to “troubled condition” status, which contributed to constraints on its operations, according to people familiar with the matter, cited by The Wall Street Journal.
The “troubled condition” status—one of the lowest designations employed by the Fed—has influenced moves by the bank to reduce risk-taking in areas like trading and lending to customers.
Shares were up 3.8% on Friday in Europe, but have tumbled 40% so far this year, putting the stock among the worst performers on the Stoxx Europe 600 index SXXP, +1.01% One possible reason for the gain is reports that the bank’s main regulator — the European Central Bank — is not that worried.
A source familiar with the view of the ECB said Friday that the central bank thinks Deutsch Bank has made “good progress” in dealing with regulatory concerns, according to Reuters.
What has Deutsche Bank said?
In a statement Friday, CEO Sewing addressed a couple of the headlines, starting with reports it had been censured by the Fed. “Deutsche Bank has been engaged in remediation work to strengthen our internal control environment and infrastructure and to address concerns that have been identified both internally and by our regulators,” he said.
He added that problems faced by the bank are not about “financial soundness,” but rather involve “identified infrastructure and control deficiencies,” which the bank is working to solve.
As for the S&P downgrade, he said it was simply down to the fact the bank isn’t profitable enough, and that the “good news” is that the agency trusts the bank will succeed with the changes that need to be made. He promised the bank “won’t disappoint.”
What are analysts saying?
A major issue for the bank is profitability, said Markets.com’s Wilson. But with shares at such a low level, there may be motive for investors to not lose hope and perhaps even add to positions right now, he added.
“There is probably a bit of value at €9 so buyers can be found there, but if trading really collapses there are not many places to turn—it has already announced a major restructuring and can’t cut much more. I think it will be taken over or merged ultimately. They can’t let it fail,” said Wilson.
“Deutsche Bank is simply a trauma,” said Heino Ruland, managing director at Ruland Research, in emailed comments, but he added that under former CEO John Cryan, who was replaced by Sewing in April, the majority of problems at the bank have likely been addressed. It is now up to the new CEO to finish that work off.
“Furthermore it is a must to consolidate market share and rebuild to obviously generate more revenues. Eventually it is just a question how much the banks needs to spend to rebuild trust in the brand name,” said Ruland. That means not just investing in investment banking, but also in private and corporate banking.
“Valuation-wise the stock is trading at a discount to book of some 70 %, which implies that the market is expecting (the bank to post) further losses. On that basis the downside should be limited,” said Ruland.
Still, he said he’d be careful with shares and base any investment decision on the bank achieving a turnaround in revenue.
“The most bullish signal would be ousting Achtleitner. No revenues at Goldman Sachs, expect for DTE IPO. Huge losses at Allianz and the worst head of the company’s supervisory board ever,” Ruland added.