Should You Hold Deutsche While Europe Is Yet To Stabilize?

We issued an updated research report on Deutsche Bank AG DB on Dec 30.

Frankfurt-based Deutsche is the largest bank in Germany, as well as one of the largest financial institutions in Europe and the world, as measured by total assets (€1.72 trillion as of Sep 30, 2015). It offers a wide variety of investment, financial and related products & services to private individuals, corporate entities and institutional clients worldwide.

The company’s shares have declined more than 15% year to date as concerns over weakness in the European economy, compressed margins and expenses related to innumerable litigation and regulatory compliances tarnished investors’ confidence in the stock.

Recently, the European Central Bank (“ECB”) announced a new large-scale financial asset purchase program (commonly known as "quantitative easing") in order to counter prevalent economic adversities. However, the country’s economy is yet to stabilize, which is anticipated to weigh on the bank’s financials in the near term. As Deutsche has been streamlining its operations, increased dependence on domestic economy can act as a major headwind.

Nevertheless, the company is proactively working toward improving its standalone performance. Following the success of its Strategy 2015+, Deutsche Bank is now focused on achieving its targets set in Strategy 2020. The company is making progress in several areas including boosting of capital strength, reorganizing its investment banking and retail businesses, and further investments in controls and resilience. We believe gradual strategic success will support the firm’s bottom-line expansion.

Moreover, we expect greater digitization, offloading of unprofitable businesses and focus on core markets to help the company achieve sustainable revenue growth in the near term. However, reduced scale of operations and management’s anticipations regarding increased cost of regulatory compliance in the upcoming quarters will likely exert pressure on Deutsche’s earnings.

Recent earnings estimates reflect analysts’ neutral stance on the company. Over the last 30 days, the Zacks Consensus Estimate has remained stable at $5.10 per share for 2015 and $4.49 per share for 2016.

Deutsche currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Better-ranked foreign banks include Grupo Financiero Galicia S.A. GGAL, which sports a Zacks Rank #1 (Strong Buy); and Barclays PLC BCS and Mizuho Financial Group, Inc. MFG, both holding a Zacks Rank #2 (Buy).

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BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
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