After Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) added €8 Euro ($10.97 billion) in equity to its balance sheet Sunday, the bank still falls short and the market should be concerned says Societe Generale in a research report published today.
“DBK needs €13bn of equity to improve its fully-loaded leverage ratio to 4.0% by end-2015, which would bring it within touching distance of the bottom of the global I-Banks peer group,” the report said. “We therefore argue that Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) still needs to raise another €5bn of equity. We believe that the market like us should be concerned should be concerned about a potential for another rights issue, which will therefore cause the share price to react weakly, rather than rebound strongly.”
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Deutsche Bank Management target “far to ambitious”
The bank’s management provided new financial targets adjusted for the equity increase, which the Societe Generale report says might be unrealistic. “We urge investors to view these targets as far too ambitious, since they are based on a ‘Strategy 2015+’ business plan that was wholly unrealistic in the first instance in our view,” the report said. In their note titled “Limping along” the bank outlined why they see Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK)’s earnings nearly 30% below consensus for 2014 and 2015. “Consensus is hoping for a rebound in FICC trading revenues, although we believe signs are that they are still in structural decline.” The report noted the consensus forecasts that say Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK)’s record low cost/income ratios, which are based on the best of both worlds: simultaneous revenue increase and cost decreases, are “simply note achievable” given “a lackluster revenue environment for the business.”
Deutsche Bank simply too expensive, ignore management estimates
The report takes aim at Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK)’s return on equity forecasts as well given Soc Gen’s lower earnings estimates and the need for additional equity, estimating a 2015 return on equity of only 6.9%, well below management’s optimistic 12% forecast. Although on paper Deutsche Bank’s relatively low price to book ratio may appear a value at only 0.6 times, the bank sees more downside the upside and re-iterates its sell rating in the stock.