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Deutsche Bank: An Overlooked Cyclical Value Play
Stock Analysis & Ideas

Deutsche Bank: An Overlooked Cyclical Value Play

Deutsche Bank (DB) is a German multinational investment bank and financial services company. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)

Business Streamlining

Deutsche has decided to streamline its business in a quest to reduce its costs and produce improved profit margins. Its stock has traded down by more than 20% over the past five years as investors have been concerned with the firm’s inefficient business model. The lack of efficiency of Deutsche’s business model is conveyed through its historical results. From 2015-19, the company reported negative earnings each year.

However, DB has posted positive earnings since 2020, and it looks to continue this trend going forward.

According to the company itself, it has made a few decisive moves during this year in its quest to catch up with the other big banks. The firm has sold much of its real estate assets, maximized the use of cloud computing to optimize internal processes, and made better employment decisions across the board.

Deutsche achieved a 76% cost to income ratio in its third quarter, and it anticipates this to drop down to the 70% level in 2022 due to its changing business strategy.

Stress Test

The bank’s risk-weighted asset ratios are sound and safe. Its latest stress test beat the required Tier 1 Equity Capital ratio by 3.06x. The result of a successful stress test usually means that a bank’s assets are set to provide predictable returns and that there’s little liquidity risk present.

Valuation

According to its forward PE ratio, the stock’s undervalued by 71.5% relative to its five-year average. Due to their cyclical market behavior, banking stocks have a knack for being value traps for prolonged periods. This probably won’t be the case this time around, with investors anticipating global interest rate hikes in 2022.

Banking stocks tend to correlate with higher interest rates because they can earn a wider spread on originated loans and higher fixed returns on invested debt. Deutsche earns 52% of its revenue from debt market operations, and this plays right into the hands of a higher rate environment.

Wall Street’s Take

Turning to Wall Street, Deutsche Bank has a Hold consensus rating, based on three Buys, eight Holds, and two Sells assigned in the past three months. The average Deutsche Bank price target of $13.76 implies 7.8% upside potential.

Concluding Thoughts

Deutsche Bank stock is significantly undervalued, and this may have been a trap in prior years. I, however, believe the stock could rise based on aspects such as a recovering debt market and the firm’s refined business strategy.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

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