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Deutsche faces tough new year after nearly 60% stock slump in 2018

Deutsche Bank AG is heading into 2019 as it tries to recover from a difficult 12 months in which it lost more than half of its market value.

Shares in Germany's largest private lender are likely to end 2018 almost 60% down after hitting an all-time low Dec. 28, closing at €6.75 on the Xetra electronic trading platform of the Frankfurt Stock Exchange. The stock started the year at €15.95 on Jan. 2.

For European bank shares overall, 2018 has been a terrible year, with the Stoxx Europe 600 Banks index dropping 28.21% since January, a decline more than twice the size of the 13.32% year-to-date drop of the Stoxx Europe 600 index. Furthermore, a massive sell-off in equity markets in recent weeks has driven bank stocks down further.

Own woes add to market pressure

Deutsche Bank's shares have taken an additional hit from troubles of its own making. The stock has been more vulnerable to market fluctuations than its peers due to the lender's long-term restructuring dragging on profitability and investor confidence.

Another blow to the share price has come from recent money laundering-related probes against Deutsche. The group was said to have played a vital role in the alleged money-laundering scheme discovered at Danske Bank A/S earlier this year, and in early December the German bank's offices were raided as part of a separate investigation into money laundering. These legal troubles may pose a risk to the execution of Deutsche's strategy as they are a distraction for management, analysts have warned.

Since the launch of the five-year revamp in late 2015, Deutsche has readjusted its strategy several times but has not been able to return an annual profit or show strong growth in group revenues.

A management reshuffle and a further "reshaping" of strategy in April added further pressure on the group to deliver on its goals. New CEO Christian Sewing has promised Deutsche will book its first profit in four years in 2018 and expects that this will give the share price a boost.

High time to deliver on targets

Deutsche's failure to meet its current strategic goals or any slowdown in the implementation of its restructuring are key downside risks for 2019, according to analysts.

There are continued execution risks inherent in Deutsche's restructuring but management has taken "decisive actions to help the bank deliver more solid and more sustainable returns," and therefore the outlook for the group is stable, S&P Global Ratings said in a Dec. 21 analysis. However, over the next 18 to 24 months the agency will evaluate "to what extent the franchise of Deutsche Bank, and its earning generation capacity, has been damaged by the management changes and restructuring during 2018."

"We will look in particular for robust delivery against 2019 objectives, such as the €22 billion cost target, a meaningful improvement in reported return on tangible equity," the analysts said.

Earning power still weak

Deutsche will have a hard time meeting its 4% return on tangible equity target in 2019 as it still struggles with high revenue attrition resulting from its decision to downsize the business, according to Firdaus Ibrahim, an equity analyst at CFRA Research. While the group plans large-scale job cuts, its revenue attrition will still outpace the planned cost cuts, leaving its cost-to-income ratio at an elevated level of around 90% compared to a peer average of 70%, Ibrahim said in a research note Dec. 29.

Deutsche's struggle to grow revenues indicates its loss of market share and competitive advantage, and will lower its chances to achieve its 2019 ROTE target, considering that it booked ROTE of 1.7% in the first nine months of 2018, Ibrahim said.

CFRA has a "hold" recommendation on Deutsche's stock, taking into account the year-to-date drop. The negative effects have already been "fairly priced" into the stock which is currently trading at 0.3x price-to-book and thus below its three-year average 0.4x price-to-book value, Ibrahim said.

A consensus among 27 analysts tracked by S&P Global Market Intelligence shows a mean price target of €9.06 on Deutsche, with most analysts recommending either to "hold" or "sell" the stock.

At 13:59 p.m. CET on Dec. 31, Deutsche Bank was trading at €6.97 on the Xetra, up 3.21% on the prior-day close.

To read S&P Global Ratings full comments on Deutsche Bank, please click here.