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Bank of America downgraded Deutsche Bank (ETR:DBKGn) to an Underperform rating (From Neutral) but raised the price target on the stock to $11.45 (from $10.50) as analysts see the company struggling to improve profitability.
Growth at DB is heavily volume reliant, consuming cost and capital resources. This likely limits RoTE to 6-7% with weak profitability and regulatory headwinds constraining capital distribution.
Bank of America raised 2023 EPS estimates by 6% as lower provisions and AT1 costs more than offset higher costs. However, ongoing cost growth outweighs slightly better credit quality over time and Bank of America reduced 2025 EPS estimates by 4%.
Management is targeting 2023 revenues of €28 billion to €29 billion, with 5-9% growth on the underlying 2022 performance. This includes €0.9B (€1 = $1.0687) from higher policy rates but the analysts also expect some reduction in FIC revenues in the investment bank, after a strong 2022. They estimate that this leaves €0.9B-€1.9B higher revenues to be delivered from growth.
Management is confident that there will be capacity to do a share buyback in 2023. Bank of America analysts wrote in a note that “For this to be possible, there would need to be some combination of higher profitability, slower growth or less regulatory inflation than we currently anticipate. Alternatively, some capital mitigation could be put in place, but this usually comes at the cost of future earnings. We currently don’t see capacity for share buybacks through to 2025E. We believe that the company can afford to continue raising the dividend 50% a year in 2023E and 2024E but see 2025E falling short of the targeted 50% payout in order to deliver a 13% CET1 ratio. Exhibit 18 shows that we estimate €0.9B dividends in 2023E, rising to €1.6B in 2025E, a 6-7% yield.”
Shares of DB are down 3.42% in premarket trading on Friday.
