When The Deutsche Bank Knife Falls, Will You Pick It Up?

| About: Deutsche Bank (DB)

Summary

The big German bank's equity is now worth less than 1% of its asset base.

Even JP Morgan Chase is valued 10 times more highly.

At some point the storm will abate.

If you think U.S. banks are bargains right now, take a look at Deutsche Bank (NYSE:DB).

Brexit has hit the German bank harder than many, dropping the stock over 17% on Friday and another 9% over the weekend. The market cap at the start of trading will be under $17 billion. The asset value of the bank? More like 1.74 trillion Euros.

Contrast that with its nearest U.S. equivalent, JP Morgan Chase (NYSE:JPM), which thanks to Brexit is also down about 9% since the start of Friday. Its asset base stood at $2.4 trillion, which is better, but its market cap is about $200 billion.

Objectively it makes little sense that the assets of a big New York bank are worth 10 times its German equivalent. At some point the scales will even out.

That doesn't mean it has to happen today or that you should rush out to your broker this morning and buy a bunch of DB stock. You don't catch a falling knife and you have to respect investment fashion.

Besides, DB has some of its own unique problems. Those legal headwinds that JP Morgan and other U.S. banks have finally seen abating are hitting the German bank hard. The issues are different. Many involve China rather than dodgy U.S. mortgages but they still cost money. The bank is going to have to keep more capital under new Basel regulations. Their whole transition to digital operations is on hold. Negative interest rates are going to hit the bank's current results hard - you can't be buying bonds that are guaranteed to lose money and not feel the pain. Several analysts have downgraded the shares and it has a mean rating of 3, which is as neutral as it gets.

But at some point this bank is going to be allowed to make money again. After almost 9 billion euros in losses during the back half of last year it actually had 210 million euros in net income during the March quarter. It continues to generate cash. I would also much rather be in a continental bank right now than an English one, and that trend is going to accelerate going forward as money flees the city in the wake of Brexit.

As I said at the outset, don't rush in and buy a bunch of DB shares, then look at old DB here dubiously next week when they're worth a bit less than they are right now. But at some point, people are going to be making money on this stock. It's not going under, and if it does you can't eat gold, either. This is the strongest bank in one of the strongest economies in the world.

When the smoke on the current action clears, you might want to take a look at it.

Disclosure: I/we 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.