The news that Deutsche Bank AG (USA) (NYSE:DB) has fired current CEO John Cryan, replacing him with Co-deputy chief executive Christian Sewing, appears to have stemmed the bleeding in DB stock.
However, beyond this week, does the move by the embattled investment bank improve the deteriorating state of affairs at Deutsche Bank or is it merely the latest in a series of actions over several years that fail to address the systemic problems at the bank?
I think you can safely say it was the latter.
Different Name on CEO’s Door
Deutsche Bank might have changed the nameplate on the CEO’s office door from Cryan to Sewing, but in reality, all they’ve done is appoint a man ten years younger. Other than that, it’s hard to understand how someone who was second in command (Sewing) is going to be able to revive what the man in command (Cryan) couldn’t.
Like a pro sports team that fires the coach when it’s underperforming because you can’t fire the whole team, Deutsche Bank is using one of the only levers it has at its disposal. Like a pro sports team, sometimes it works, sometimes it doesn’t.
InvestorPlace’s Vince Martin recently called Deutsche Bank one of The 10 Worst Stocks to Buy for Q2. Martin argues that DB stock does provide some value at $14. However, the long-term turnaround of the bank will likely take several quarters, if not years, to fix. Thus, it’s better to just stay away.
Here’s How I See It
The new CEO will be the third chief executive or co-chief executive tandem to run the bank since long-time leader Josef Ackermann stepped down from the investment bank in May 2012.
“[Cryan] had to battle serious problems that his predecessors swept under the rug for years,” stated Independent Research analyst Markus Riesselmann. “He’s largely cleared those up and now it looks like Deutsche can’t turn things around regarding margins, but I doubt a new chief executive could successfully make that transition. It seems rather to be a fundamental ‘Deutsche Bank problem’.”
Deutsche Bank hasn’t had an annual profit since 2014. Since then, it has piled up losses of more than 9 billion euros. As recently as June 2016, Deutsche Bank failed a stress test by the Federal Reserve, one of only two banks out of 33 to do so.
That puts it in special company along with the U.S. business of Banco Santander, S.A. (ADR) (NYSE:SAN).
Why would you buy the stock of a bank that’s shown zero ability to sustain any kind of profitable growth when you can buy something like SVB Financial Group (NASDAQ:SIVB) that continues to do a fantastic job providing capital and banking services to entrepreneurs in the U.S. and elsewhere.
Over the past decade, SVB Financial’s delivered an annualized total return of 28%, 41 percentage points better than Deutsche Bank over the same period.
When it comes to commonsense decision making, I’m with my colleague. It makes no sense to buy Deutsche Bank stock until it can deliver sustainable profits on an annual basis.
Even if you don’t go want to go with SIVB, which trades at 6.4 times revenue — DB trades at less than one times revenue — Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS) trade at reasonable price-to-sales multiples of 3.2 and 2.7, respectively, and they generated more than $10 billion in net profits in 2017 combined.
Bottom Line on Deutsche Bank Stock
There are good investment decisions; there are bad investment decisions. And then there are dumb investment decisions.
Buying DB stock because they’ve rearranged the deck chairs on the Titanic is just plain dumb.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.