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Do Distressed Valuations Mean It’s a Good Time to Buy Deutsche Bank?

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Valuations

Deutsche Bank’s shares are currently trading at distressed valuations. The bank’s shares are trading at the steepest discount to its book value, worse than the 2008 financial crisis, which is evident from the company’s price-to-book (or PBV) multiple. The price-to-book ratio compares the company’s current market price to its book value. PBV ratios are commonly used to compare financial services firms (XLF) because most assets and liabilities of banks are constantly valued at market values. If a company trades lower than its book value, it means the asset value is overstated or the company is generating a poor return on its assets. Generally, banking stocks trade between one to two times their book value. Stocks trading lower than their book value attract investors’ attention, as they are considered to be generating extremely poor returns.

Deutsche Bank trades at a PBV of 0.38x, which implies a discount of ~62% 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.

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Performance review

Deutsche Bank has been under fire in the past one year. Shares of the company are down 25% in 2016. The stock has fallen to all-time lows after the US Justice Department asked it to pay $14 billion as settlement for its residential mortgage-backed securities investigation. Investors raised concerns regarding its ability to pay without declaring bankruptcy. The bank reached a settlement with the DOJ to pay $7.2 billion.

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