Wednesday 26 March 2014

Analysis of Deutsche Bank (DB) 2014

A German investment bank

Company: Deutsche Bank

Business: A German investment bank and the largest bank in Germany. They have five products and services pillars that they call: Private & Business Clients (classical banking services: accounts, deposits, loans, pensions products), Asset & Wealth Management (helps institutions and wealthy individuals to increase their wealth across all asset classes), Corporate Banking & Security (sales, trading etc of financial products such as equity, bonds etc. as well as dealing with mergers and acquisitions), Global Transaction Banking (world wide banking services and products for corporates and institutions. This is why Deutsche Bank is consider to be systemic important in the world) and finally None-Core Operations Unit (simply they put all the risky assets in this part so that they can still run around claiming that the "core" bank business is doing extremely well with such a high profit and only this little non important unit is what is dragging down the rest of DB. There is a good word to describe what I think about that but I will not write it on this blog).

Active: Traditionally a large bulk of their activity is taking place in Frankfurt in Germany and of course in London in the UK. In total they are however present in 70 countries in every continent in the world.

P/E: 49.1 (P/E5: 13.1)

contrarian values of P/E, P/B, ROE as well as dividend
The P/E of DB is awful with 49.1 and only by looking at the P/E5 does it become slightly better with 13.1 but still it is high. The P/B is down at 0.6 which is excellent! However based on the current P/E Grahams formula gives a no go to Deutsche Banks. The earnings to sales are very low with only 2% and the ROE is ridiculously low with 1.2%. My old grandma is getting a better return on her savings than what DB manage to accomplish! Like almost all the banks the book to debt ratio is very low with only 0.04 and something that I generally do not like. In the last six years they have managed to accomplish a yearly negative growth in the size of -0.2% which is bad and this gives us a motivated P/E of 8 to 10 which means that DB is today overvalued on the market. They pay a small dividend of 2.4% which even though it is so tiny still represents 116% of their earnings and one should really consider if it makes sense to pay out dividends when they very clearly need to build up their capital further especially if we consider that they went out and sold shares to institutional investors last year to bring in some more money.

Conclusion: Neither Graham nor I see any reason to step into Deutsche Bank today and it is very clear that they have still not managed to get out of their troubles. I still believe that DB will start to make profits again and that the share price will once again reflect those earnings but it seems to be far away and I realise that I very clearly stepped in too early as a shareholder in DB and I must learn to wait until the trouble is gone and then step in.

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