EUR 850.00 For Business Accounts Only

Morningstar | Media Reports Raise Possibility of U.S. Equity Exit at Deutsche Bank

Over the weekend reports in the financial media suggested Deutsche Bank is planning to create a noncore unit to wind down capital-intensive assets as well as to exit its loss-making U.S. equity business. Further, it is being reported that Deutsche is set to refocus its operation on transaction banking and private wealth management. With returns on equity in low single digits and a potential tie-up with Commerzbank out of the picture, Deutsche faces the need of more radical measures to improve profitability. Overall, we think such a measure could be a positive, although we are of the opinion that this would only be the beginning of a long path to profitability. The bank has not confirmed the reports.

Deutsche trades at one of the highest discounts to book (0.2 times) in the European banking sector. While we do not anticipate to change our fair value estimate of EUR 9.20 per share on the back of this news report, we think investors should look for a sufficient margin of safety before stepping in, given Deutsche’s very high uncertainty around strategy direction and business execution.

We think the plan to create a noncore unit could improve sentiment around management’s commitment to tackle the larger issues facing Deutsche Bank. Shareholders have demanded Deutsche to shed itself of its loss-making U.S. equity business for some time now, a move management had tried to avoid. We believe declaring the U.S. equity operation as noncore will clear up confusion around where management sees Deutsche’s future. The exact nature of its future and whether it is a profitable one remains an open question, however. A speculated shift toward private wealth management is a logical step given regulatory capital requirements, although the German market is well served with existing large and well-connected European wealth managers. Equally, refocussing on the notoriously competitive and low-profitability German retail market is not the brightest prospect for Deutsche, either.

We put less emphasis on a potential move of capital-intensive assets into the noncore unit. We expect that these assets will remain on Deutsche’s balance sheet and therefore continue to tie up capital. Also, as we understand it, assets in question are derivative products for which profits have been booked already but require a significantly longer time to mature. As such, they do not constitute toxic assets in the traditional sense but simply are uneconomical under current capital requirements. Declaring such assets noncore does little to shareholder value other than a change of reporting, in our view.