DB - Deutsche Bank AG

[cobafdek]

BAC-level book value, and this:  http://finance.yahoo.com/video/cnbc-29093777/meredith-whitney-s-favorite-bank-stock-30218582.html#crsl=%252Fvideo%252Fcnbc-29093777%252Fwhitney-s-favorite-bank-pick-30218582.html

 

Anybody interested? 

[PlanMaestro]

Deutsche Bank Swings to Loss as It Cleans Up.

http://online.wsj.com/article/SB10001424127887323701904578275110950896562.html

 

The fourth quarter was hit by €1 billion in litigation charges "reflecting adverse court rulings and developments in regulatory investigations," the bank said.

 

Adding to uncertainty for the bank, Germany's ruling coalition has drafted a proposed law requiring banks with proprietary trading, high-frequency trading or hedge-fund-financing operations that make up either 20% of the balance-sheet value or surpass €100 billion in value to transfer these risky businesses into legally and financially separate units. Mr. Jain said it is too early to know what type of impact the proposed law might have, and declined to provide further detail.

 

Spurring the uptick in the share price, Deutsche Bank reduced risk-weighted assets by about €80 billion through sales, new risk calculations and other measures in the second half of the year, Mr. Jain said. The bank's core Tier 1 capital ratio under new regulations known as Basel III rose to 8% from 6% a year ago. Eventually the bank will need a ratio of more than 9.5%.

 

"In simple terms, this is the equivalent of raising €8 billion of core Tier 1 capital without dilution," Mr. Jain told analysts on a call Thursday morning. "Many of you had given us a feedback of that's what we should have done. We stayed resolute, and indeed we feel we've been able to achieve the targets we promised you."

 

The bank's balance sheet shrank by €174 billion to €2.01 trillion in the fourth quarter from the third quarter.

 

Still, analysts raised questions about the internal models used to calculate the bank's core Tier 1 capital ratio, which contributed about 25% of the reduction to the bank's risk-weighted assets. Regulators in some countries are considering introducing a standard set of guidelines to be used in risk calculations, which would likely be harsher than most banks' models, analysts say.

 

[Gilp]

Hello board!

 

This is my first idea here and I'm mostly an amateur, so would love to hear your feedback.

 

Just came by this bank and looked at the numbers at morningstar.

Looks like it currently trades at 0.5 P/B. The net revenue looks quite similar in the recent 5 years, but the expenses in 2012, 2013 and TTM are almost same as the revenue, so the profitability is an issue here.

 

I don't really know how to evaluate banks(specially investment banks) other then looking at P/B and EPS, but I thought it may be interesting to you guys.

 

Would be interesting to hear your opinion and maybe giving me some clues(if there is really an opportunity)on how to do more homework here.

 

Thanks

 

Gil

 

[ukvalueinvestment]

My opinion is that this goes in the "too hard" pile..... for pretty much anyone.  The balance sheet is a black box.  And we all know that investment banks have not been good for shareholders in the long run in the past, and we all know that the German banking sector is intrinsically unprofitable. 

I defy anyone to tell me what it's earnings power in 5 years is.

 

 

[dutchman]

Do you guys find Standard Chartered more interesting at this point ?

[ukvalueinvestment]

I assume you mean as a short?

[lathinker]

Gilp,

 

funny enough I happened to look at DB today post their numbers aswell so can share a few thoughts:

In general, I am not in the camp of people who say "all banks are on the too hard pile". Some banks have a relatively simple and stable business model and I would argue that the pure operations of DB (Investment Banking, Commercial Banking, Transaction Baking, Wealth Management) can be good businesses.

 

In terms of valuation, for conservativeness I would look at Tangible Book Value rather than Book Value, i.e. exclude intangible assets. In terms of DB:

 

Share price: 25 EUR

TBV/share: 37,37 EUR (1.5x Share Price)

BV/Share: 47,98 EUR (2x Share Price)

 

One issue with German banks has been lack of capital and resulting dilution of shareholders when capital had to be raised. DB raised some capital this year, they appear sufficiently capitalized now and easily passed the ECB "stress test" (they would have passed even without the 8.5 bn equity raise). Therefore, I do not think a further dilution is to be feared.

 

Normally, for a company to trade at 1x BV, it should earn precisely its cost of equity capital. Now, you can discuss what that is (or how much you need to make upon investing in DB). I would put the number in the area of 10%. DB has 66 bn EUR in equity, so it would need to make 6.6 bn EUR a year in order to be worth 48 EUR/share. DB has never made that much money in their history and their RoE in the last years was more like 2%.

If you look look at their presentation, you will see they made about 7 bn in what they call "Adjusted IBIT" in the first 9 months of 2014. "Adjusted IBIT" exclude costs for restructurings, litigations, their Non-Core Unit (internal bad bank), other non-ordinary factors and income taxes which have been weighing on their results for a long time - and an end does not appear in sight (yet).

 

Accordingly, if DB ever got to really "normalize" their business and managed to move away from their legacy problems, there might be a chance for significant price appreciation.

However, management has guided cautiously citing a weak macro-environment and DB may have to pour more money into lawsuits. So, the path to improvement is not clear.

So overall, in my view, investing in DB is not the worst idea, but will require some patience. Following poor returns and dilution by capital raise, DB is now a "hated" stock which in my view is a good thing.

[constructive]

ECB stress tests are pretty laidback compared to US stress tests, yet many banks are still failing. The European banking sector is substantially undercapitalized and still needs to raise hundreds of billions to meet Basel III. I think that will continue to weigh on bank valuations, even those that don't need to raise money.

 

http://www.ibtimes.co.uk/36-european-banks-would-have-failed-stress-test-based-basel-iii-norms-1472049

[saltybit]

This has continued to drop. Probably bec. of recent regulatory run-ins?

[ItsAValueTrap]

Buffett has a pretty good understanding of investment banks especially because he worked at Solomon Brothers for 9 months.

 

There are reasons why he rarely invests in them.  They're black boxes especially in their derivatives book.  Historically, they haven't treated shareholders that well.  They usually find some way of hurting themselves on some new business line.  I think the only investment bank where he bought the common shares was Wells Fargo coming out of 2008/09.  If things get really ugly at investment banks that they may be worth looking at... e.g. when a number of them are about to go bankrupt or have gone bankrupt.

[merkhet]

I would separate out investment banks (GS) from banks that have deposits (BAC, WFC, JPM).

[lathinker]

There were some reports recently that they are considering to adjust their strategy as the current one does not deliver the results they hoped for:

 

http://www.businessweek.com/news/2014-12-18/deutsche-bank-says-it-will-review-strategy-in-coming-year

 

Interesting enough, most reports suggest that theyy might consider selling Postbank, the most retail-oriented part of the DB-empire which apparently does not operate efficiently enough. Postbank's large deposit base does not seem to be of a great value to DB in the opinion of DB's management. DB may try to become more like UBS with a focus on asset & wealth management. However, they remain anchored strongly with corporate clients both of international character and in the "Mittelstand". They should also be able to make money by connecting these clients to capital markets, given they still have a fine investment banking operation.

 

Also, I remain hopeful that they will not have to raise additional capital. Most of the value destruction for shareholders in the past was done by diluton through capital increases.

 

IMHO, if they play their cards well, there should be significant upside from here.

 

[ccplz]

  I think the only investment bank where he bought the common shares was Wells Fargo coming out of 2008/09.

 

Wells Fargo is not an investment bank.

[ItsAValueTrap]

  I think the only investment bank where he bought the common shares was Wells Fargo coming out of 2008/09.

 

Wells Fargo is not an investment bank.

 

Ok... they are involved in a number of businesses including investment banking.

[longlake95]

Anyone doing any work on DB? Seems safe and cheap - a squarely out of favour. Just starting to read up on them.

 

LL

[bbarberayr]

I own it.  Their financials are quite complex, so it's a bit of a leap of faith, but I think it does well.

 

Basically, my thinking comes down to the fact that it is one of the cheapest Euro-financials on many metrics.  It has a reasonable dividend, meets the banking capitalization requirements and I have to believe management raised all the capital they need. Business show improvement due to a focus on cost cutting and reduced competition in investment banking, plus an improving European economy.

[lathinker]

Interesting days at Deutsche Bank.

 

They reported Q1 numbers today: https://www.db.com/medien/en/content/5060_5155.htm?kid=pr.inter_ghpen.headline

 

Also, on Friday, they preannounced some results of their strategic review: They are looking to deconsolidate Deutsche Postbank, a retail bank they bought a few years back. Also, they are looking to reduce leverage and RWA in their investment bank.

Full announcement and analyst call are to follow tomorrow.

 

[lathinker]

Results of strategic review:

 

- Postbank to be taken over completely at first (currently DB owns 96-97%), then be sold entirely or via stock market. This implies a squeeze-out for Postbank which yesterday caused Postbank's share price to rise by ~14%.

- No other division to be given up. To the disappointment of many analysts, DB will keep its private customer section.

- Additional investments in transaction banking, asset and wealthmanagement and digital infrastructure.

- Reduction of leverage in corporate and investment bank by ~200 bn EUR.

 

Targets by 2020:

- CET1 ratio of 11% (currently 11.1%)

- Leverage ratio of 5% (currently 3.4%)

- RoE ambition of 10%+ (most recently 3%, prior ambition of 12%)

- Payout ratio of 50%

 

Now this is interesting. DB are already where they want to be in terms of CET1 ratio. Accordingly, they have no pressure to reduce their risk-weighted assets (RWA). Just the opposite, they can grow RWA along equity. At the same time, they still want to shrink their overall balance sheet to improve their leverage ratio. Accordingly, you can expect them to get rid of low-RWA positions (at least on the balance). That target pattern might boost their risk appetite and strengthen their (more RWA intensive) trading business.

 

Analysts were pretty annoyed by their new (lower) RoE ambition. I understand you want to have a higher RoE, but they may just be managing down expectations a bit after years of promising 15% or 12% and delivering 0%-6%. On the other hand, given they have RWA capacity, they might look into more profitable stuff. Also, year annualised RoE in Q1 was about 12%, so getting to 10% in the next five years does not appear overly aggressive.

 

On the other hand, if DB can do 10% regularly, the stock looks cheap: Their TBV per share is around 40 EUR, so if they earn 4 EUR per share and pay 2 EUR per share, a stock price of 30 EUR is rather on the cheap side, though not a screaming buy.

 

 

 

[undervalued]

I am surprise no one has been posting anything about DB since there are so many things going on with it. I am guessing everyone is running away from it?

[TwoCitiesCapital]

I am surprise no one has been posting anything about DB since there are so many things going on with it. I am guessing everyone is running away from it?

 

Pretty sure anyone who was looking at it before the last month probably feels burned by it by now and there's not much for those who didn't own it to say other than "thank goodness."

 

I sold puts on it, but that was more because vol premiums were exceptionally high. I was getting 6-10% of notional at risk to underwrite the the risk that the common wouldn't fall an additional 20+% in the next 6 weeks. Seemed reasonable since all of the recent panic really started with the settlement discussions and not any real questions related to liquidity and capitalization.

 

[John Hjorth]

TwoCitiesCapital,

 

Personally, I was not even aware of this topic in the investment ideas forum. Up here in Northern Europe, a lot is being written every day about DB and the calamities of the bank, and it scares the crap out of me, what this might bring, if this bank eventually ends up failing.

 

What do you indend to do, if you get the shares assigned based on your selling of puts?

[TwoCitiesCapital]

TwoCitiesCapital,

 

Personally, I was not even aware of this topic in the investment ideas forum. Up here in Northern Europe, a lot is being written every day about DB and the calamities of the bank, and it scares the crap out of me, what this might bring, if this bank eventually ends up failing.

 

What do you indend to do, if you get the shares assigned based on your selling of puts?

 

I'd probably hold.

 

The total notional value would be less than a 2% position and I'm ok with that for a bank at 0.20x tangible book value (near my strike price). Would still be one of my smallest equity positions in the portfolio and one that has the opportunity to go up 30-40% in a day if there was an upside surprise.

 

DB is definitely one of the worst-positioned banks, but that doesn't mean it's going out of business. It'd be tougher for me to sell those options going into an environment like August of 2015 or January 2016, but global stress is lower right now and it's literally ONLY DB causing panic at the moment. The business itself will likely underperform similar banks but I'm ok selling very temporary, 6-week insurance, against another massive decline AFTER a particularly large leg-down for 6-10% of the notional I'm insuring.

 

Might turn out bad - but typically these types of sales have worked for me in the past (even with energy names) just because fear/greed seem to consistently overprice options after large moves in the underlying. I'd say it probably added close to an additional 1% in returns for my entire portfolio last year by selling select covered calls and cash covered puts in periods of market volatility. 

 

 

[SharperDingaan]

We picked up a smallish position shortly after the open this morning. For us its purely a technical position, & bought because it was under the 50 day moving average, & had an RSI in the basement. If we make a quick 5-10K on the punt, it's Xmas money.

 

SD 

[John Hjorth]

TwoCitiesCapital & SharperDingaan,

 

Thanks for your replies. The only balls still active in production I have are in my two Logitech Wireless Trackball M570. Personally, I stopped breeding about 25 years ago. Other balls still active  [not in productive environment], but only for pleasure and fun.

 

I really need to think about this.

 

What are your perceptions of your potential downsides of your positions?

[TwoCitiesCapital]

TwoCitiesCapital & SharperDingaan,

 

Thanks for your replies. The only balls still active in production I have are in my two Logitech Wireless Trackball M570. Personally, I stopped breeding about 25 years ago. Other balls still active  [not in productive environment], but only for pleasure and fun.

 

I really need to think about this.

 

What are your perceptions of your potential downsides of your positions?

 

Well, via put options, the most I can lose is 100% of notional if DB gets wiped out in the next 6 weeks so it'd be a hit of <2% to portfolio performance this year.

 

That's assuming the absolute worst case scenario. If all my covered puts went bust for all positions I've sold them on, it'd be a loss of around 5% and would reduce the optionality value that I have in holding cash. A reasonable trade off for the 5-10% returns I'm earning on that cash in periods measured in weeks and not months.