- Barclays initiated coverage of Deutsche Bank with forecasts "materially below consensus, which is already well below management targets."
- Barclays believes Deutsche Bank will struggle to cut costs, is likely to lose market share as it shrinks its US business, and could face a credit downgrade.
LONDON - Barclays has begun coverage of Deutsche Bank with a highly bearish note.
Analyst Amit Goel initiated coverage in a note sent to clients on Monday, rating the stock as "underweight" and with a target price of €8 ($9.48), compared to Tuesday's price of €11.22 ($13.30). Goel's earnings estimates are "materially below consensus, which is already well below management targets."
Goel wrote, "A potential ratings downgrade by S&P could be a negative catalyst, if it leads to further client outflows/market share loss." S&P downgraded Deutsche Bank to credit watch status in April after the bank's CEO change.
Deutsche Bank in February reported a full-year loss of €497 million ($589 million) for 2017, its third straight year of losses. CEO John Cryan was ousted in April, and his replacement, Christian Sewing, announced plans to scale back US operations and cut jobs as a result.
"We think the steps outlined by management with Q118 results will lead to lower profitability in the near term, and are unlikely to solve the challenges the group faces," Goel wrote in Monday's note. "Specifically, we expect the group to continue losing market share and to struggle to achieve its cost-cutting targets."
Barclays expects Deutsche Bank to struggle to cut costs to €23 billion ($27.2 billion) this year as it is targeting. Trade unions in Germany have reportedly negotiated pay rises of 3% this year and strict Germany labour laws "make it challenging to reduce personnel cost."
Goel expects Deutsche Bank will also have to offer generous retention payments to hang on to key executives. Bloomberg reported on Tuesday that several senior Deutsche Bank staff have left the company in recent weeks.
Turning to revenues and profitability, Goel forecasts return on tangible equity of just 2% in 2020, compared with Deutsche Bank's target of 10% in normal conditions.
"It is widely understood that underlying profitability is very weak," Barclays' Goel wrote. "This has been the situation for many years, and the current valuation multiple of 0.45x TNAV suggests investors do not believe it will change any time soon."
He added, "At some point, we think it makes sense to consider more radical changes, as the lack of profitability - and hence organic capital generation - create ongoing risks."
A merger with Commerzbank could help drive cost synergies, Goel suggests, but "would involve significant execution risk and the benefits might not be apparent for many years."
Barclays bearish note comes a day after Steve Eisman, the money manager famous for being the main character in "The Big Short", called Deutsche Bank a "problem bank" that has "real profitability issues."