We recently compiled a list of the 7 Best European Bank Stocks To Invest In. In this article, we are going to take a look at where Deutsche Bank Aktiengesellschaft (NYSE:DB) stands against the other European bank stocks.
The global banking landscape is undergoing a profound transformation, driven by a confluence of factors including rising interest rates, technological advancements, and shifting regulatory requirements. According to the latest Global Banking Annual Review by McKinsey, the banking sector is witnessing a resurgence in profitability after a prolonged period of historically low interest rates. This period of rejuvenation has been bolstered by a favorable macroeconomic environment, which has helped boost net interest margins and, consequently, overall profits for financial institutions worldwide. However, this recovery comes amidst a backdrop of significant changes and challenges that require banks to adapt and evolve. European banks, in particular, are at the forefront of this transformation. The region’s financial institutions are not only navigating the broader shifts affecting the global banking sector but are also leveraging their unique strengths to adapt to a rapidly changing financial environment. The report “European Private Banking: Resilient Models for Uncertain Times” by Mckinsey sheds light on how European banks are strategically positioning themselves to thrive amid uncertainty. These banks are embracing advanced technologies, such as artificial intelligence and digital payment solutions, to enhance their operational efficiency and service offerings. By integrating these technologies, they are able to meet the evolving demands of customers and stay competitive in an increasingly digital world.
The resilience of European banks is evident in their strategic responses to regulatory and macroeconomic shifts. With regulatory scrutiny intensifying and new players entering the financial landscape, European institutions are adopting diverse strategies to maintain their competitive edge. This includes scaling their digital platforms, improving risk management frameworks, and adapting to changing economic conditions. The ability to balance traditional banking operations with innovative approaches is helping these banks navigate current challenges and position themselves for future growth. The recent increase in interest rates has had a significant impact on the banking sector, particularly in Europe. This rise has led to an improvement in profitability, making European bank stocks an attractive investment opportunity. As banks continue to adapt to the evolving economic environment, they are well-positioned to capitalize on new growth opportunities and deliver strong returns to investors. The strategic advancements being made by European financial institutions, combined with their ability to navigate regulatory and macroeconomic changes, underscore their potential for long-term success.
In a recent conversation at the Twenty-Eighth Annual European Financials Conference in Madrid, Kerstin af Jochnick, a member of the ECB’s Supervisory Board, and Chris Hallam from Goldman Sachs discussed the outlook for the European banking sector. They noted the sector’s increased resilience, attributed to higher capital levels, reduced legacy non-performing assets, and improved internal models. The ECB’s Supervisory Review and Evaluation Process (SREP) highlighted that banks have strong capital and liquidity positions, benefiting from higher profitability. This robustness was confirmed by last year’s stress tests and the ECB Financial Stability Review, which showed euro area banks as resilient despite a challenging macro-financial environment. However, while banks are in a strong position, they face future challenges. Economic slowdowns and high interest rates may lead to asset quality deterioration and affect profitability. Banks are advised to plan for adverse scenarios and manage risks, especially in sectors like consumer credit and commercial real estate, which have shown some vulnerabilities. The ECB emphasizes the need for banks to enhance risk management frameworks and address internal governance deficiencies.
Despite higher profitability, European banks’ valuations remain relatively low compared to international peers. This discrepancy is attributed to cyclical, structural, and regulatory factors, including market concerns about sustained profitability and regulatory levies. The ECB believes that tailored efforts are necessary to improve valuations, including adapting business models, completing the banking union, and addressing regulatory issues. Consolidation within the European banking sector has mainly been domestic, with limited cross-border mergers. The ECB supports increased cross-border mergers to enhance market integration but recognizes that legal and structural barriers, such as differing regulations and a lack of common deposit insurance, hinder progress. Regarding Basel III standards, the ECB stresses their importance for maintaining a robust banking system. The implementation of Basel III is on track to start in January 2025, and the ECB is involved in developing technical standards and guidelines. The ECB also advocates for improved resolution processes for failing banks and broader use of resolution tools to ensure financial stability. Efforts are being made to address vulnerabilities, such as those in the commercial real estate sector, which have shown lower-than-expected impacts on banks so far. Lastly, the ECB emphasizes the need for banks to better incorporate climate-related and environmental risks into their risk management frameworks. While the ECB does not dictate specific green lending policies, it insists that banks must manage these risks as they would any other material risk. For more detailed information, refer to the ECB’s discussions and publications on these topics.
Investing in European bank stocks offers a compelling opportunity for those looking to benefit from the sector’s recovery and transformation. The ongoing evolution of the banking industry, driven by technological innovation, regulatory adaptation, and strategic responses to macroeconomic shifts, presents a promising landscape for investors. As the sector continues to evolve, identifying and investing in leading European bank stocks provides a pathway to potentially substantial returns and long-term growth.
Our Methodology
To compile a list of the best European bank stocks, we first made a list of all European banks and asset managers that trade on the NASDAQ and NYSE stock exchanges. Then, they were ranked by the number of hedge funds that had bought their shares during Q2 2024, and out of these, the top European bank stocks were chosen.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Deutsche Bank Aktiengesellschaft (NYSE:DB)
Number of Hedge Fund Holders: 13
At number four on our list of seven best European bank stocks to invest in is Deutsche Bank Aktiengesellschaft (NYSE:DB). Deutsche Bank Aktiengesellschaft (NYSE:DB) delivered a robust Q2 2024 performance, significantly surpassing earnings expectations with an EPS of $0.76, compared to the anticipated $0.49. The bank reported strong revenue growth across its business segments, driven by capital-light businesses like Corporate Banking and Origination & Advisory, which gained market share. Despite a substantial litigation provision of EUR1.3 billion related to the Postbank acquisition, Deutsche Bank Aktiengesellschaft (NYSE:DB) underlying operational performance remained strong. Excluding this provision, the bank’s post-tax return on tangible equity was 7.8%, an improvement from 6.8% in the previous year, marking its best first half since 2011.
The bank’s cost-to-income ratio improved to 69% from 73% year-on-year, and its CET1 ratio remained solid at 13.5%, reflecting strong capital strength. Deutsche Bank Aktiengesellschaft (NYSE:DB) also made significant progress in operational efficiency, realizing substantial cost savings and achieving a 17% increase in pre-provision profit year-on-year. Notably, the Corporate Bank saw a 16% increase in incremental deals, while the Private Bank reported EUR19 billion in net inflows, contributing to growth in assets under management. Deutsche Bank Aktiengesellschaft (NYSE:DB) strategy to enhance its global market presence and strengthen client relationships is clearly paying off. With EUR30 billion in revenue within reach for 2024 and ongoing cost reductions, the bank is well-positioned to achieve its 2025 targets, including a return on tangible equity of over 10%. The strong performance across various segments and continued focus on operational efficiency underscore Deutsche Bank Aktiengesellschaft (NYSE:DB) resilience and growth potential, making it a compelling investment opportunity.
The number of hedge funds in Insider Monkey’s database owning stakes in Deutsche Bank Aktiengesellschaft (NYSE:DB) fell to 13 in Q2 2024, from 14 in the preceding quarter. The consolidated value of these stakes is nearly $0.45 billion. Among these hedge funds, Douglas Braunstein And James Woolery’s Hudson Executive Capital was the company’s leading stakeholder in Q2.
Third Avenue Value Fund stated the following regarding Deutsche Bank Aktiengesellschaft (NYSE:DB) in its first quarter 2024 investor letter:
“Idiosyncratic as the details of Bank of Ireland’s progress may be, many of the underlying principles are surprisingly common today. Deutsche Bank Aktiengesellschaft (NYSE:DB) (“Deutsche”) shares many similarities. Its capital base and balance sheet have improved dramatically in recent years. Management changes in 2018 precipitated sweeping changes in the way the bank is run, which, when combined with an improved interest rate environment, have led to Deutsche Bank’s greatly improved operating results. During 2023, Deutsche produced a return on tangible equity of roughly 7%, and it presently trades at roughly 51% of tangible book value, which marries with a price-to-earnings3 multiple of roughly 7x. Similar to Bank of Ireland, there is little incentive for Deutsche Bank to retain much of its earnings and continue to grow its capital base, unless compelled by regulators to do so, as long as each Euro of retained capital is being valued at roughly 50 cents. Deutsche recently announced that it will increase its dividend 5 materially in 2024, and plans to make additional, successive, 50% dividend increases in each of the next two years. The company also implemented a substantial share buyback, which is highly attractive from our long-term shareholder perspective, given that the shares are presently valued at roughly 50% of tangible book value and offer an earnings yield nearly twice the bank’s return on equity.”
Overall DB ranks 4th on our list of the best European bank stocks to buy. While we acknowledge the potential for DB as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
