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Deutsche Bank: Struggling To Outrun Its Past

Part 1

Summary

  • Share price depreciation has persisted along with mounting losses.
  • Comparing DB to its peers on a P/B basis may make it seem cheap, but don't be fooled.
  • DB has spent €12.7 bn in litigation cost since 2012 but there are still many skeletons in the closet.

Deutsche Bank is on the ropes. Can it survive?

Deutsche Bank's (NYSE:DB) shares have been down nearly 50% over the past year. It reported a record loss of €6.8 bn ($7.7 bn) in 2015, the second year of loss after the 2008 crisis. It has a market cap of $22.8 bn which is half that of HDFC Bank (NYSE:HDB), a local player in the Indian market. It has a P/B of 0.3, which roughly implies you would get more value after liquidating its assets than selling the entire company.

As you can see in Exhibit 1 below, DB's peers like JP Morgan (NYSE:JPM) with P/B of 1, HSBC (NYSE:HSBC) and Citigroup (NYSE:C) both with P/B of 0.6 have higher P/B ratios. In fact, all European banks, with the exception of UBS, are lagging behind their American counterparts. This is due to a worsening macroeconomic environment in Europe, including low GDP growth rate, negative interest rates and weakening of the Euro as compared to the dollar. But leaving aside these macro issues, DB suffers from deep structural issues of its own. And this is reflected in its low market valuation, which should not be construed as a no-brainer to buy... CONTINUE READING



Part 2

Summary

  • DB is highly bloated as compared to its peers with an average cost-to-income ratio of 90%.
  • DB has antiquated and incoherent IT systems which increase its maintenance cost thereby reducing operating leverage.
  • The company's culture is broken.

In Part 1, we explored Deutsche Bank's (NYSE:DB) superficial appearance of being undervalued as well as its history and likely continuance of litigation troubles and regulatory crackdown. In addition to these headwinds, DB has a bloated cost structure that just seems to not come down. In addition to a fat pay structure, DB will face additional costs in trying to bring its technological infrastructure up to par with its competitors across Europe and America including J.P. Morgan (NYSE:JPM), Citigroup (NYSE:C), UBS (NYSE:UBS), and Goldman Sachs (NYSE:GS).

Cryan has been beating with an iron bush to cut down the bloated costs at DB. At a recent social gathering in Frankfurt, he grumbled to investors about the bank's wasteful culture and the fact that he can only do so much. Cryan has eliminated many perks ranging from chauffeured cars to company jets and airport VIP services. He supported the elimination of bonus for the bank's executive board in 2015. Bonuses have even been reduced for all employees across the company to 'share the pain'... CONTINUE READING

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