The coming to power of Donald Trump, and his allowing of inflation to return in the form of higher oil prices, is doing wonders for Deutsche Bank AG (USA) (NYSE:DB). DB stock — which was a falling knife in June, has turned into a winner since the November election.
I called that turn a month beforehand.
The German mega-bank started 2016 at $23 per share, fell to as low as $11, but is now trading near $19 as it resolves the scandals of its past. The bank predicts good times will roll under President Trump.
If Trump can deliver for banks, Deutsche Bank stock could rocket upward. The bank had assets of $1.688 billion at the end of October, but its huge derivatives book had sent the market cap of the bank below $20 billion before its recent run-up.
Even today, DB stock trades at just 35% of book — less than half the price of comparable American banks.
Why Buy DB Stock?
Deutsche Bank’s situation is not too dissimilar to that of U.S. banks in the wake of the 2008 financial crisis.
At the bottom, you could get JPMorgan Chase & Co. (NYSE:JPM) for under $25, Bank of America Corp. (NYSE:BAC) for under $4, and even Wells Fargo & Co (NYSE:WFC) for under $14. Since then, thanks to government support and improving business conditions, all three have more than tripled in price, while returning to paying dividends.
The bank’s chief economist, David Folkerts-Landau, told journalists that the promise of tax cuts and infrastructure spending could double U.S. growth in the next few years. DB has also raised its global growth forecast to 3.4% for 2017.
Deutsche Bank believes it can pounce on those opportunities, dramatically increasing its own margins, without running afoul of regulators, who it sees being put out to pasture by the new Administration. The bank’s own financial crimes cop recently quit in an argument over how many employees he would have under him, and was quickly replaced.
At the same time, DB expects trouble to hit over-leveraged Asian markets, which will make European and American assets that much more attractive.
What If They’re Wrong?
Even if the bank’s growth forecasts prove inaccurate, Deutsche Bank is still so cheap that your risk is going to be minimal. Its forward price-to-earnings ratio — based on current earnings estimates which are far below those of the bank itself — is still 14, in line with those of its peers.
It could run much further.
JPM, for instance, carries a market cap of $310 billion with assets of slightly over $2.5 billion. If Deutsche Bank were priced similarly in relation to its assets, it would be worth about $180 billion — six times more than it is now. Higher oil prices could allow it to unwind its derivatives book and deliver that kind of return.
That may not happen, but even if it doesn’t a return to positive margins and market stability could easily triple the value of the stock over the next two years.
Worth the Risk?
European banks, in general, have been doing very poorly in the stock market, but the pending exit of Great Britain from the European Union could turn that around quickly, with its big banks seeking to increase their presence in the larger European marketplace.
It’s yet another unexpected tailwind for Deutsche Bank, which while still speculative is beginning to look more-and-more like one of the great turnaround stories of 2017. Who knew how well Germans could do from an American election?
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
