Deutsche outlook no worse after election upset

Bank Watch: Deutsche outlook no worse after election upset

Another day at the office

Monday was another day at the office for Germany’s underperforming large caps too, including Deutsche Bank, after conservatives won elections with the lowest vote since 1949. Deutsche bank was among the bottom three DAX stocks, in keeping with being Europe’s worst-performing large bank share this year. Deutsche and other vehicles of investor dissatisfaction, like utility RWE, which fell almost 5%, were always set to bear the brunt in the event of an election upset, even though Germany’s main stock index remained aloft. But everyone knows Deutsche’s problems go much deeper. Its shares have lingered near the all-time lows they hit last September and have now lost well over 10% since the group completed its €8bn capital hike in April.

Ex-distressed Deutsche

Other valuation measures show that progress is being made. Deutsche’s 50% discount to tangible book value at last check is better than its ‘distressed’ sub-30% early last year. Efforts by turnaround CEO John Cryan to cut the group’s cost base are going in the right direction…slowly. Costs fell 6% in the year to Q2—excluding restructuring expenses, legal charges and one offs. Deutsche’s capital has also improved. April’s cash call lifted the crucial core Tier 1 capital buffer to 14.1%, well away from 10.8% seen around a year ago. And the group also lived to tell the tale in January after settling a U.S. Department of Justice case for ‘only’ half the $14bn prosecutors initially demanded.

Negative returns

But revenues still fell 10% in Q2, with the biggest hit in investment banking, from which Deutsche makes more than half its revenues. Investors have also punished the group for missing out on the fixed income, currencies and commodities (FICC) trading mini boom in the second half of 2016. FICC has historically accounted for a third of Deutsche’s profits. All told, first-half return on tangible equity was a meagre 3.8%, and even that looks great compared to trailing ROE from Reuters data suggesting a negative return if Deutsche were to report this week. Investors have thereby recognised it will be a stretch to hit Cryan’s 10% ROE target for 2018.

Commerzbank also straining

Deutsche is not alone in its problems, to be sure. Shares of arch rival, Commerzbank, whose market value of €14bn is half that of the larger bank, also fell on Monday. Commerzbank is down 94% since end-June 2007 highs, slightly more than Deutsche. The spanner in the European integration works implied by Chancellor Angela Merkel’s weak win is a risk for all lenders. In the near term it could certainly cool tentative interest in Commerzbank from UniCredit, reported last week. Commerzbank bank is also barely through its own revamp plan, slated for completion in 2019.

Deutsche remains the most pivotal bank in Germany though, and the election result is certainly no help on its long journey back to health. But a more finicky political landscape can scarcely make the slog much worse.