On Nov 18, 2013, we downgraded our recommendation on
Deutsche Bank AG
) to Neutral from Outperform based on the disappointing
third-quarter results. Results were adversely affected by
litigation related expenses. Moreover, the regulatory reforms and
an unsettled global economy might act as deterrents going
Rationale Behind Downgrade
Deutsche Bank reported disappointing results in the third-quarter
of 2013 aided by high legal expenses. Net income stood at €51
million ($67.5 million), substantially down from €754 million
($998.6 million) in the prior-year quarter. Additionally, the
performance was also affected by rise in expenses and lower
With continuously rising non-interest expenses, the company is
exposed to operational risks. Expenses surged at a CAGR of 11.3%
over the last 5 years (2008-2012). Moreover, non-interest
expenses increased 1% year over year in the first nine months of
2013. Continuation of such a trend will remain a hindrance for
Due to the nature of its business, Deutsche Bank is involved in
litigation, arbitration and regulatory proceedings in Germany and
a number of jurisdictions outside Germany. Such matters are
subject to many uncertainties. Though the company has resolved a
number of important legal matters and made progress on others, we
expect the litigation environment to continue to be challenging.
For Deutsche Bank, over the last 30 days, the Zacks Consensus
Estimate for 2013 decreased 2.3% to $5.85 per share, while it
declined 1.3% to $6.82 per share for 2014. Currently, Deutsche
Bank carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some foreign stocks that are currently performing well include
Westpac Banking Corporation
Banco Santander, S.A.
Itau Unibanco Holding S.A.
). All 3 companies carry a Zacks Rank #1 (Strong Buy).
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