Deutsche good or Deutsche bad – update 01

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There has been a lot of headlines just recently about Deutsche bank. This article takes a look at the various scenarios.

  • Equity impairment (capital raise).
  • Equity repayment (sale of assets).
  • Market uncertainty (the pending fine)
  • Market clarity (what happens next)
  • Business going forwards (or loss of)
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Into the detail

Outside the plethora of media propaganda and hearsay, investors have access to Deutsche Bank financial results (annual reports) on this link.

According to the first line 2015 annual report “2015 was a challenging year for Deutsche Bank“. The first obvious takeout, is that investors are in for the long run with strategy 2020 which takes on 4 key deliverables.

  1. to become simpler and more efficient. (cost)
  2. to become less risky by modernizing our technology. (cost)
  3. to become better capitalized. (cost)
  4. to run Deutsche Bank with more disciplined execution. (cost)

All the above indicate limited returns for equity risk out to 2020 assuming the bank meets its targets.

Here are the headline numbers (or not) that come out from the above.

  1. eliminate approximately 90 legal entities – so this is 45 per year or 1 every fortnight.
  2. “We aim to modernize our IT architecture, for instance by reducing the number of individual operating systems” – this is simply an open cost with no headline value leaving the investor open on risk.
  3. reduce Risk Weighted Assets (RWAs) from €410 billion to €320 billion by 2018 and €100 billion by 2020. – this is over €100 billion per year of RWA (€8.5 billion per month continuously for 3 years).
  4. no value assigned to this task again leaving the investor open on risk.

The bank will also exit from legacy Rates assets, Agency Residential Mortgage-Backed Securities (RMBS) trading and high risk-weight securitized trading. This translates to significant reduction in top line revenue. even before other activities such as Emerging Markets Debt, Rates & Credit OTC clearing are rationalized!

 

Image result for arrow picture  Margins will be slim.

The well reported drop in market capitalisation leaves the bank at less than 50% of it’s 2015 reported value.

Is this discount enough or has the market, in fact, not priced in enough (as may be the case from the open $14 billion department of justice fine) which at the current point in time represents the entire market capital of the firm.

 

 

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