Analyst: Deutsche Bank Profits To Remain Under Pressure

Deutsche Bank AG DB has initiated a sweeping restructuring plan in a bid to boost profitability. While the restructuring is necessary, the profitability goal is long-dated and near-terms earnings are likely to be weak, according to Bank of America.

The Analyst

Bank of America’s Andrew Stimpson maintained an Underperform rating on Deutsche Bank with an unchanged price target of 5 euros.

The Thesis

Deutsche Bank launched an ambitious restructuring plan, which involves exiting equities and lowering costs by 6 billion euros, Stimpson said in the note. He added that the company has already initiated headcount reductions of 18,000 employees.

While management has a track record of achieving cost reductions, there are concerns related to capital ratios and revenues, both of which could “get worse before improving,” Stimpson mentioned. He added that Deutsche Bank’s new non-core unit (CRU) could continue to be a drag on profits till 2022.

The company is targeting 8% returns, versus breakeven in 2018. While this would be a significant achievement, banks typically have a hard time growing or even sustaining revenues alongside downsizing and cost cutting, the analyst commented.

Stimpson further noted that Deutsche Bank may need to achieve a higher growth rate than what the 2018-2022 CAGRs currently imply. Moreover, the company could face an unfavorable interest rate environment over the next few years, as the ECB seems likely to announce rate cuts rather than hikes.

Price Action

Shares of Deutsche Bank traded lower by another 2.4% to $7.36 at time of publication.

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