Deutsche Bank Ratings Blow Shrugged Off by Street as Stock Gains

(Bloomberg) -- While Deutsche Bank AG’s staff are apparently sick of bad news surrounding the German lender, most analysts were more upbeat on Friday, despite the fresh blow of a credit-ratings downgrade by S&P Global.

The bank’s shares rose as much as 4.2 percent, the most in more than five weeks, recovering some of Thursday’s losses when it slumped to a record low amid reports that U.S. regulators added Deutsche Bank to a list of troubled lenders that they are monitoring.

Chief Executive Officer Christian Sewing, appointed in April, said the shares deserve a better valuation. But at least one analyst disagreed, with RBC Capital Markets downgrading the stock and cutting its price target to match the street low of 8 euros.

Here’s more on what analysts had to say:

RBC, Anke Reingen

(Underperform from sector perform; target 8 euros from 12 euros)

  • “We were holding on to the belief that the situation could not get worse. We have been proven wrong,” Reingen said in a note to clients. Latest update that Deutsche Bank’s U.S. units have been categorized as in a troubled condition raises new concerns, despite the bank saying any deficiencies identified by regulators are only related to processes.
  • Notes there’s a risk that regulators do not give Deutsche Bank time to restructure the business and improve returns, with the uncertainty potentially affecting performance.
  • Cuts corporate and investment bank revenue estimates further, partially reflecting weaker industry trends, but also disruptions from press reports and restructuring. Had already factored in achievement of cost targets and doesn’t see any potential to cut costs further.

Mainfirst, Daniel Regli

(Neutral; target 10 euros)

  • “Deutsche Bank has an earnings problem, not a balance sheet problem,” Regli said by email. “We do not believe that Deutsche Bank is becoming a second Lehman case, given its solid capital and liquidity ratios.”
  • Does not expect the downgrade to have a material impact on the bank’s funding costs, nor ability to do business. Says liquidity position is “decent enough,” in line with that of Commerzbank AG and UBS Group AG.
  • Bank must deliver on cost targets and prove it’s able to cut back without harming its core businesses. “Even though we continue to model a miss by 500 million euros ($583 million) on the 2019 cost target, we are now more optimistic than consensus on costs for 2019 and later years.”
  • While continuing to be skeptical on the operational strength of Deutsche Bank, and seeing some further headwinds on revenue, says there could be material upside on an eventual delivery on cost targets.
    • “Extreme downside scenarios can now largely be ruled out.” Says general business environment is gradually improving for investment banks, which could help the top-line at the lender.

Markets.com, Neil Wilson

  • “S&P didn’t call into question Deutsche Bank’s soundness,” but the downgrade is two-fold: one, the restructuring is risky -- deeper and with non-negligible execution risks. Suggests possibility “it could all go very wrong.” Two, Deutsche Bank just isn’t profitable enough and will trail its peers, who are now pretty well done with their post-crisis cleanouts.
    • “The fact is that while restructuring can deliver important cost reductions, it is less clear what Deutsche’s plans are to grow revenues thereafter. Deutsche has been slow to restructure and now it’s got to sprint to catch up.”
  • Says Sewing may be right in his assertion that the bank is simply not profitable enough, rather than being fundamentally unsound, “but the problem is that if profits continue to trail then the stock will come under yet more pressure and ultimately a takeover/merger becomes the only route out.”

©2018 Bloomberg L.P.

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