Avoid Deutsche Bank On Poor Earnings And Regional Instability

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 |  About: Deutsche Bank AG (DB), Includes: OGZPY, SBRCY
by: Livio Filice

Summary

Review of Deutsche Bank's earnings and the impact of regional geopolitical events.

Major Russian banking and gas stocks have been hit due to recent regional events.

A wait-and-see approach over the summer is the best approach on Deutsche Bank.

It is fair to say that Deutsche Bank (NYSE:DB) has had better days. Deutsche Bank's first issue is regional instability due to the ongoing Ukraine-Russia activities. Investors generally tend to shy away from investing in regions where political and military issues exist. Worse, short sellers smell opportunities and are quick to batter down companies such as Deutsche Bank on news developments in the region.

Russia is using Ukraine to show its neighbors, and indeed the world, that it is still a military power with a lot of muscle to flex. Russia ordered snap military drills to test the combat readiness of the armed forces across the Western and Central military districts of Russia. It was estimated that 150,000 troops, 90 aircraft, 880 tanks, 1,200 pieces of military hardware and more than 120 helicopters participated in the exercises, which involve operations along Russia's western borders, including those with Ukraine.

Not only is Russia actions hurting the region, the implications may be worse for Russia. For Russia, the costs of acting on its threats and the recent events in Ukraine are significant. Though Russia already has a strongly protectionist economy, new trade restrictions on Ukraine would still harm Russian industry, especially in regions bordering Ukraine, where Russia's already-struggling regional economies are closely linked to Ukraine's industrial east. Cutting natural gas exports to Ukraine would reduce revenues for companies such as Gazprom OAO. Gazprom (OTCPK:OGZPY) is a Russian gas pipeline operator and a key gas supplier to European countries. Gazprom shares have fallen nearly 20% since the beginning of 2014. Moreover, annexing Crimea sets a dangerous precedent for Russia itself. If Ukraine can be divided, than what message will this send to other separatist regions within the Russian Federation, specifically Chechnya and Tatarstan, which are primarily populated with non-ethnic Russians? The annexation of Crimea will eventually lessen Russia's influence over Ukraine's political future, as the largely pro-Russian Crimeans would no longer be able to vote in Ukrainian national elections.

The current events are having significant implications on Russia's leading banks as well. Sberbank Rossii OAO (OTCPK:SBRCY) is a Russia-based commercial bank. It provides a range of corporate and retail banking services. Sberbank operates through a network of numerous branches, regional offices, retail outlets, subsidiaries and representatives offices located throughout Russia and into other regional countries, such as Ukraine, Belarus, Germany, China, India and Kazakhstan. Since the political events have heightened in Ukraine in Q1 2014, Sberbank has seen its stock price drop over 30% from the $12.50 range down to current pricing in the $8.50 range.

Deutsche Bank's second issue at hand is the poor results that were recently issued. In summary, Income before Income Taxes (IBIT) was down 30% from Q1 2013, Core Bank IBIT, which excludes the Non-Core Operations Unit, declined 17%, and New Revenues fell 11% year-over-year. Deutsche Bank cited the decline is largely related to Corporate Banking and Securities results.

Commenting on 1Q2014 results, Jürgen Fitschen and Anshu Jain, co-chief executive officers, said:

"As we approach the half way point of Strategy 2015+, we are pleased to have progressed step by step toward our 2015 objectives and are ahead of plan on key dimensions. We remain focused on meeting these objectives and reiterate our commitment to our business model."

With the regional instability issues dragging on, poor quarterly results and the European summer just months away, it may be best if potential Deutsche Bank investors check back in the fall. There should be additional information on Deutsche Bank's future plans, internal turnaround and some clarity on the current Ukraine-Russia crisis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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