Barclays bullish on Deutsche Bank; upgrades to overweight

Investing.com -- Barclays (LON:BARC) in a note dated Monday has upgraded its rating for Deutsche Bank AG (ETR:DBKGn) (NYSE:DB) to “overweight”, reflecting a positive shift in their outlook for the bank.

This upgrade is based on Deutsche Bank’s business mix, earnings potential, capital distribution plans, and valuation metrics. 

Barclays' analysts see Deutsche Bank as particularly well-positioned in light of the anticipated rate cuts.

“Unlike most other banks, DBK gets less than 50% of its revenues from NII (DBK 47% vs. median bank 66%),” the analysts said.

With rate cuts expected to become more pronounced in September, Barclays expects that investors will favor banks with diversified revenue streams. 

Deutsche Bank’s revenue profile—featuring substantial contributions from market-related activities, such as sales and trading, and investment banking fees including M&A and ECM—aligns well with this trend. 

This diversified revenue base is expected to be advantageous as rate cuts accelerate, potentially enhancing Deutsche Bank’s revenue growth.

“Our EPS forecasts are 7% ahead of company-compiled consensus in 2024, and 15%&21% ahead in 2025&2026, respectively,” the analysts said.

This bullish outlook is driven by anticipated revenue growth and cost reductions, despite slightly falling short of Deutsche Bank’s own EPS targets for 2025. 

Barclays' positive perspective is underpinned by recent credit rating upgrades, increased deposits, and successful cost-control measures. 

“We forecast DBK will distribute a total of €9.5bn in 2021-25 vs. company guidance of >€8bn,” the analysts said. 

Looking ahead to 2024-2026, Barclays expects distributions totaling €9.1 billion. This includes projected dividends per share (DPS) of €0.68, €1.00, and €1.25 for 2024, 2025, and 2026, respectively. 

Additionally, share buybacks are expected to reach €675 million in 2024, €1.35 billion in 2025, and €1.5 billion in 2026. This substantial capital return, which represents over 30% of Deutsche Bank’s market cap for FY24-26, is likely to boost investor confidence and drive the bank’s share price higher.

Barclays’ flag that Deutsche Bank’s shares are trading at relatively low multiples compared to their earnings potential. 

As per their projections, Deutsche Bank is valued at 4.8x P/E and 0.45x P/TBV for 2025, with an estimated return on tangible equity (ROTE) of around 10% for 2025-2026. 

In comparison, the sector average stands at 7.0x P/E and 0.9x P/TBV, with a ROTE of approximately 13%. 

Barclays sees this valuation gap as a notable opportunity for re-rating, especially in light of Deutsche Bank’s robust earnings forecast and advantageous business mix.

However, Barclays notes certain potential risks but considers them manageable and not adverse to their favorable investment outlook. 

While recent macroeconomic challenges in Germany are acknowledged, Deutsche Bank’s exposure is predominantly to low-risk German mortgages, which constitute a significant portion of its loan portfolio. 

Moreover, commercial real estate loans present a downside risk of approximately €0.6 billion to earnings, but this is deemed manageable. Leveraged loans are also a consideration, with potential impacts on EPS and CET1, but these risks are regarded as within acceptable limits.