Transformation Will Lead To A More Resilient Bank By 2025

Key Takeaways

• Deutsche Bank's transformation enhances risk resilience and sets the stage for improved earnings, focusing on technology investment and operational efficiencies.
  
• The bank pursues growth in Corporate, Private, and Investment Banking, leveraging market share and pricing strategies while committing to shareholder returns through share buybacks and dividend increases.
  
• Litigation, restructuring costs, and regulatory changes may pressure Deutsche Bank's net margins, operational efficiency, and shareholder returns in a competitive banking landscape.

Catalysts

A stock corporation, provides corporate and investment banking, and asset management products and services to private individuals, corporate entities, and institutional clients in Germany, the United Kingdom, rest of Europe, the Middle East, Africa, the Americas, and the Asia-Pacific.

• Deutsche Bank's transformation has resulted in what they describe as a fundamentally different bank with improved risk profile and resilience, setting a platform for improved earnings power starting in 2025. This is expected to enhance future earnings.
  
• The bank's investment into technology, controls, and operational efficiency is designed to create cost savings, allowing for flat adjusted costs while increasing revenue. This is expected to improve net margins by reducing redundancies in their cost base.
  
• The company has committed to capital returns with a €750 million share buyback program and a dividend per share increase. This initiative is expected to enhance earnings per share (EPS) as the share count is reduced.
  
• Deutsche Bank has set ambitious growth objectives to further strengthen their position in Corporate Banking, Private Banking, and Investment Banking, focusing on revenue growth through market share expansion and pricing strategies. This is anticipated to drive an increase in total revenue.
  
• Continued investments in growth areas and infrastructure, particularly in the Corporate Bank, are expected to yield revenue growth beyond 2025. The stability provided by a strong CET1 ratio and improvements in asset management are set to bolster net interest income and non-interest revenue streams.

Deutsche Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deutsche Bank's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.7% today to 19.4% in 3 years time.
• Analysts expect earnings to reach €6.5 billion (and earnings per share of €3.44) by about April 2028, up from €3.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €7.4 billion in earnings, and the most bearish expecting €5.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.4x on those 2028 earnings, down from 11.6x today. This future PE is lower than the current PE for the GB Capital Markets industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.83%, as per the Simply Wall St company report.

Deutsche Bank Future Earnings Per Share Growth

Risks

• Ongoing litigation and nonoperating costs, including specific litigation items such as the Postbank takeover and Polish FX mortgages, pose a risk to net margins and overall earnings.
  
• Elevated restructuring and severance charges, as well as the need for further cost management, may impact operational efficiency and net profit margins.
  
• Uncertain future credit provisions, particularly within the commercial real estate sector, could weigh on net earnings if the credit environment worsens beyond current expectations.
  
• Execution risks associated with transformational investments and achieving forecasted revenue growth in a competitive banking environment might pressure future revenue stability.
  
• Potential regulatory changes, including Basel IV and FRTB implementations, could influence capital requirements and subsequently shareholder returns or strategic investments.

Valuation

• The analysts have a consensus price target of €21.135 for Deutsche Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €28.4, and the most bearish reporting a price target of just €10.93.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €33.5 billion, earnings will come to €6.5 billion, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of €22.38, the analyst price target of €21.14 is 5.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.