Do Deutsche’s Distressed Valuations Present a Buying Opportunity?

Valuations

Deutsche Bank’s (DB) shares are currently trading at distressed valuations. The bank’s shares are trading at the steepest discount to its book value—worse than during the 2008 financial crisis. This discount can be judged by the company’s PBV (price-to-book) multiple, which compares the company’s current market price to its book value.

PBV ratios are commonly used to compare financial services firms because most assets and liabilities of banks are constantly valued at market values. If a company trades lower than its book value, it means that the asset value is overstated or that the company is generating a poor return on its assets. Generally, banking stocks trade between 1x and 2x its book value. Stocks trading lower than their book values attract investor’s attention because they are considered to be generating extremely poor returns.

Do Deutsche’s Distressed Valuations Present a Buying Opportunity?

Deutsche Bank trades at a PBV of 0.27x, which implies a discount of ~73% to its book value. Such cheap valuations are associated with a bank in crisis and are also a sign of the company’s poor profitability. Its peers Credit Suisse (CS), UBS, and Barclays (BCS) trade at a significant premium to Deutsche Bank.

Performance review

Deutsche Bank has been under fire for the past year. Shares of the company have fallen 45% YTD (year-to-date) and 55% year-over-year. Last month, the stock fell to all-time lows after the US Justice Department asked it to pay $14 billion as a settlement in a residential mortgage-backed securities investigation.

Comparatively, shares of banking peers (EUFN) like Credit Suisse (CS), Barclays (BCS), and Royal Bank of Scotland (RBS) have fallen 41%, 38%, and 52%, respectively, YTD.