Deutsche Bank ratings blow shrugged off by street as stock gains

Bank’s shares rose by as much as 4.2 per cent on Friday, despite S&P downgrade

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 per cent, the most in more than five weeks, recovering some of Thursday’s losses when it slumped to a record low amid reports that US regulators added Deutsche Bank to a list of troubled lenders that they are monitoring.

Chief executive 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:

“We were holding on to the belief that the situation could not get worse. We have been proven wrong,” RBC Capital Bank’s Anke Reingen said in a note to clients. The latest update that Deutsche Bank’s US. units have been categorised as in a troubled condition raises new concerns, despite the bank saying any deficiencies identified by regulators are only related to processes.

She noted 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.

“Deutsche Bank has an earnings problem, not a balance sheet problem,” Mainfirst’s Daniel Regli said by email. “We do not believe that Deutsche Bank is becoming a second Lehman case, given its solid capital and liquidity ratios.”

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He cut corporate and investment bank revenue estimates further, partially reflecting weaker industry trends, but also disruptions from press reports and restructuring. The bank already factored in achievement of cost targets and doesn’t see any potential to cut costs further.

He did not expect the downgrade to have a material impact on the bank’s funding costs, nor its ability to do business, and said the liquidity position is “decent enough,” in line with that of Commerzbank AG and UBS Group AG.

The 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 sceptical on the operational strength of Deutsche Bank, and seeing some further headwinds on revenue, he said there could be material upside on an eventual delivery on cost targets. “Extreme downside scenarios can now largely be ruled out.”

“S&P didn’t call into question Deutsche Bank’s soundness,” said Markets.com’s Neil Wilson, but the downgrade is two-fold: one, the restructuring is risky – deeper and with non-negligible execution risks, and 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.”

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,” he said.