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Deutsche Bank’s (NYSE:DB) equities business has been slipping in recent years despite the success of the firm's fixed income business, which so far has compensated for the decline. [1] Recent reports also mention that among the top 8 other global investment banks including competitors like Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), UBS (NYSE:UBS), Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS), Deutsche Bank’s equities business has stumbled to seventh place this year from fourth in 2004.

We have a near $61 price estimate for Deutsche Bank, which is a significant premium to the current market price of the stock. We believe the current low price reflects the market’s negative sentiments over the the growing European debt crisis compounded by uncertainty of the impact of the U.S. debt rating downgrade.

(Charts created using Trefis' app)

Fixed income powerhouse will face challenges from new regulations

Deutsche Bank boasts of being ranked 2nd among global investment banks in terms of total revenue generated by its sales & trading division. The bank’s fixed-income business also rakes in more revenue than any other investment banks besides Goldman Sachs.

But impending capital requirement changes by the phased implementation of Basel III are expected to hit the fixed-income business beginning next year and will weigh on returns. The introduction of additional regulations like the Volcker Rule, which put a ban on proprietary trading will also prohibit the firm’s profitability. [1]

… and the equities operations will need to compensate

Deutsche Bank is aware of its need to shift its focus to improve its equities operation, which has underperformed the firm’s bond business. The bank has yet to establish a grip on the U.S. equities and derivatives market, which represents almost 50% of the global commissions revenue in equities.

We currently forecast 7%-8% annual growth in the size of Deutsche Bank’s equity and derivatives portfolio for the Trefis forecast period. However, with the bank focusing on expanding its equities business considerably in subsequent years to achieve a top-three spot in global equity standings, the annual growth may very well be a double-digit number if DB finds the right formula for growth.

To understand the impact of faster growth in the traded equities asset-base on Deutsche Bank’s estimated $61 price, you can make changes to the chart above.

Notes:

  1. Jain Fails to Replicate Deutsche Bank Debt Dominance With Equity Trading, Bloomberg, Aug 30 2011

Disclosure: No positions

Source: Deutsche Bank Stumped On How To Get Its Bond Trading Mojo To Work For Equities