The struggles of the banking sector have been well documented, with most bank indexes down more than 30% this year. While some investors are optimistic about the industry, there hasn't been a lot of recovery to show among bank stocks, unlike in other industries. In fact, of the top 100 banks by assets according to the FDIC, only a few have seen their share prices rise above where they started the year.
So, maybe it's fitting that the top-performing large bank stock this year -- by far -- is one that few investors would guess. Deutsche Bank (NYSE: DB) traded for $7.78 per share on Dec. 31 and hit $9.81 at Wednesday's close, representing a 26% gain year to date. Let's examine what is driving this growth during such a difficult time for banks.
Successful revamp efforts
Germany's largest bank was struggling before the coronavirus pandemic. It didn't have one profitable quarter in 2019. And since 2017, it has been dogged by regulatory issues that have not gone away. In May, the Federal Reserve sent a letter to the investment bank criticizing its anti-money-laundering internal controls. And on Aug. 5, The New York Times reported that the District Attorney's Office in Manhattan subpoenaed Deutsche Bank last year for documents related to its longtime customer President Donald Tump, including his tax records.
But concerns about Deutsche Bank's regulatory issues appear to be overshadowed by progress made toward transforming the bank, an initiative that began in 2018. Not only has Deutsche Bank managed to turn a profit in the first two quarters of 2020, but it has accomplished many of its strategic goals amid a difficult environment plagued by the pandemic.
When Deutsche Bank began its revamp, its goal was to whittle down its business to four client-centric divisions: investment banking, corporate banking, asset management, and the private bank. Deutsche Bank's other goals are to exit certain business lines, sharply cut operating costs, invest in technology, and manage capital. Through the second quarter of this year, the bank has shut down its equities sales and trading division. The bank has also slashed $3 billion of annual expenses since 2018, and it plans to chop another $3 billion by 2022.
Deutsche Bank has done all of this while still managing to invest in its business. CEO Christian Sewing said on the company's most recent earnings call that the bank's plan to spend $13 billion on technology between 2018 and 2022 remains intact.
Recently, the bank signed a contract with Google Cloud to "transform its IT architecture," an ongoing process for banks in today's digital world. The partnership will provide Deutsche Bank with enhanced data science capabilities, artificial intelligence, and machine learning. The bank said in a press release that the partnership could give its treasury management clients the ability to do cash flow forecasting and improve cybersecurity. At the private bank, Google will help "simplify the interactions between customers and employees."
Sewing said the bank's goal is to have the company generating annual revenue of 24.5 billion euros and delivering an 8% return on tangible equity by 2022. "With the client momentum that we have created and the changes we have made to our businesses, we are confident of achieving these revenue plans for 2022 even when current market dynamics normalize," Sewing said on Deutsche Bank's most recent earnings call.The investment bank division had extremely strong revenue in Q2.
Watch its progress
Deutsche Bank continues to execute on its strategic initiatives at a difficult time, and continues to provide guidance for the rest of the year, which is a good thing to see for a bank right now. Analysts on Deutsche Bank's earnings call seemed a bit skeptical about the bank's ability to reach its target revenue goal by 2022 with everything going on, and on some of its guidance as well. And there is still a lot of regulatory work Deutsche Bank must do to get into better standing with regulators. But if the bank continues to work its way through its four-year revamp plan like it has in the first half of this year, its stock price should continue to tick up.
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