Deutsche Bank AG (DB)

[Is Europe a bad bet?] He would broadly stay away from European banks. They have a limited history as public companies. Europe is terribly over banked. He suggests you are better off with an American bank that serves Europe.

(A top pick June 29/18, up 9%). They have announced they are going to have higher earnings. Interest rates are going up in Canada, USA, and Bank of England. Thinks rates will also go up in Europe. A lot of room for Deutshe Bank to go higher. Difficult to time these, but you want to be there.

Worst performing of the European banks, down 31% YTD. Have to attend to restructuring, and interest rates not rising in Europe. Commercial lending and wealth management are fine, but everything else is stagnant. This one is the bottom of the barrel. Haven’t caught up from problems in 2008. Dividend cut. High risk, lower return.

(Past Top Pick, August 24, 2017, Down 25%) He's stayed in this and even added more. He misjudged the turn in European banking, then DB bank fired its CEO. It will do well when the European banks do well, which happens when interest rates will stop being negative, normalize and break-out. Stay the course.

You don’t look at this as a short term holding. It is the main bank of Germany and it is too big to fail. Everything that could go wrong has – interest rates have gone up, quantitative easing has weakened and now the US regulatory agencies have accused them of being under funded. However, the value has fallen so far it is too good to pass up for a long term holding. Yield 1.2%. (Analysts’ price target is $12.34)

The issue is they have not recovered from issues in the US and the global 2008 financial crisis. The CEO has just been replaced. The problem is regulators have forced banks to get out of higher margins business. The Trump Administration has helped reverse some of this. If you have a multi-year hold this could be interesting.

(A Top Pick Jun 9/17, Down 19%) They are on their second turnaround team. The assets are good. It is a bank that went through 2008 and will not fail but we had to wait a long time. This one is the problem child in Europe. He has not sold it and will give them a couple more quarters.

He would stay away from it. They are mostly focused on lines of business that are shrinking. For example, they do a large business in writing letters of credit, but international trade has been shrinking, as a percentage of GDP, for years. Deglobalization started in 2010/2011 has been happening for years, since Accenture concluded that offshoring probably cost money rather than saving money. There is now a trend of nearshoring: jobs are coming home because costs are lower here. You don’t need letters of credit when you are moving within a region. Also, they face capital strain under Basil III. They were a very significant underwriter of mortgage-backed securities. Sub-Prime and Alt-A products basically don’t exist any more, so Deutsche Bank no longer offers that mix of products; it is now marketing a low-margin product. A recent report from JP Morgan can be summarized as “They should shut their New York branch and go home.” They have been severely impacted by Tax Reform and their financing in the US appears to be high cost.

Rising interest rates will benefit large banks. Their CEO changed through a disastrous period, but DB has since recovered. Caveat: big banks may raise their dividends slower than the smaller global banks.

Down 30% in 2018. They've been cost-cutting, selling assets and fired the CEO. Also, US banks are enjoying interest rate hikes, but not Europe's banks because interest rates aren't moving. DB doesn't have a model for good capital allocation and its underwriting is not great. Net interest income growth was -15% last year. Poor earnings in last quarter. You're speculating on this as a turnaround play. Risky. Other banks are safer.

There are better European banks to own. It's a little expensive. They are large in capital markets, but not in (German) retail. In the corporate finance side they invested heavily in fixed income. Balance sheet isn't as good as other banks and they'll probably issue more equity down the road. They're trying to sell their asset management business, which is wrong, because it generates fees. Plus, there's more re-structuring to come. Their culture has to change. Santander, Barclays, Lloyds and ING are better.

(A Top Pick May 4/17. Up 18%.) When that option expired in October, it was below the Strike price, so the option would have just expired worthless.

It is too complicated for him to invest in. It is too difficult to analyze.

Has been a laggard and went through things other banks haven’t. Chart looks similar to last year’s where we had some higher lows, where the longer-term trend was broken. You want to see this move up through that line substantially, and it has already done that. Some indicators are starting to turn up. This should move with rates going higher. The break out through $18 was an indication this should move higher.

He wouldn't buy this. There are so many other banks you could buy that are in much better shape. The difficult thing is that they don't know what they want to be. They had a massive investment banking franchise. He would suggest looking at Bank Santander (SAN-N), a good retail bank and a good wealth management company in Europe with a huge franchise in Latin America.