Deutsche Bank Worth $48 Despite Euro Zone Exposure

 

The last few months were certainly eventful for Deutsche Bank with the European debt crisis threatening to impact even the entire euro zone economy.

The German bank has had to contend with tough regulatory requirements, which are likely to force it to raise a substantial amount of capital next year, and its exposure to sovereign debt in surrounding countries is no doubt a source of concern.

We do not believe that those risks justify the sub-$40 levels at which the bank�s shares have traded of late. We recently revisited our forecasts for the bank and revised our price estimate for the bank�s stock from $61 to $48, which is about 30% above the current market price.

We attribute this upside to the overly punitive market sentiment toward the banking sector, with Bank of America and Morgan Stanley leading the pack when it comes to share price declines.

Below we detail the reasons for the revision in our price estimate.

See our full analysis for Deutsche Bank

Sales & Trading Operations to Limp Along for a While

We estimate that Deutsche Bank�s debt and equity trading operations account for nearly a third of its total value � something also quite evident from the fact that these operations typically contribute between 30% to 40% of the bank�s revenues under normal economic conditions.

Deutsche Bank�s trading revenues have suffered in recent quarters like most of its competitors due to volatile global market conditions. The bank�s significant exposure to debt in some of the worst hit European economies also resulted in some sizable the bank having to write-off a significant amount of its sovereign debt � further hitting the bank�s performance numbers.

Uncertain market conditions and the introduction of regulations such as the Volcker Rule are expected to continue to pressure the sales and trading business. Accordingly we have lowered our near-term trading asset growth forecasts.

There is also the risk that the debt issues persist, which would result in further write-offs and pressure on trading margins.

Private & Business Banking Growth to Slow

We estimate that nearly a quarter of Deutsche Bank�s value comes from the banking services it provides to individual and business clients � effectively comprising the bank�s retail and commercial banking businesses.

As economies worldwide feel the effects of the prevailing economic uncertainty, we have cut our growth forecast for private and business client assets to about 5%. Despite these downward revisions we still believe that Deutsche Bank is oversold and is well-positioned from a long-term standpoint.

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