Deutsche Banks Faltering Recovery

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What's going on?

Deutsche Banks stock fell 5% after it reported financial results that were hit hard by massive legal charges but the stock is still way higher than it was last summer

What does this mean?

Germanys biggest bank lost almost 2 billion in its most recent quarter, mostly due to a 1.6 billion litigation charge. However, it wasnt just the fine that hit its profit: revenue growth at its investment bank (e.g. stock and bond trading) sharply lagged behind competitors such as JPMorgan. Deutsche Bank blamed the tepid activity partly on clients choosing to do less business with it because of the turmoil the banks own stock faced over the summer (for various reasons, clients might avoid trading with a bank that even hints at having serious financial trouble). Also, the bank is undergoing a major restructuring, and the resulting cost cuts likely affected its ability to maintain market share with clients.

Why should I care?

For the stock: The worst appears to be over, but plenty of issues remain.

Investors, in a word, panicked last summer as rumors of a massive fine from the US government circulated. The fine turned out to be smaller than some had feared, but Deutsches legal costs still remain high. Also, its ability to generate profits in the future has been compromised by its restructuring. Research analysts continue to think that the bank will ask shareholders for more money (i.e. sell more shares) which would probably hurt the stock price as current shareholders would then own proportionally less of the company.


The bigger picture: European banks are looking much healthier in general.

Most of 2016 was brutal for many European banks, partly due to the prevalence of negative interest rates. Since banks typically hold lots of cash, its not a good thing when it costs money to hold onto that cash which is exactly what negative interest rates entail (click here for more background). As interest rates have increased, stock prices of most European banks have followed.

Originally posted as part of the Finimize daily email.

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