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Deutsche Bank's Year End Analysis and Review - BoomBustBlog Style Featured

By: Reggie Middleton | Monday, February 13, 2017
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This is our Q4 analysis of Deutsche Bank. When analyzing and valuing entities such as banks and platform-driven tech companies, perception is always key. You see, what one maverick or true contrarian may see, very few others can perceive. The difference, oft times, is sometimes as simple as... They were looking.

While many analysts and investors may be focusing on its solvency and progress with litigation, there's one thing that I think many are missing. Investment banks are not like manufacturing companies or other industrials, where there's a heavy investment in plant and equipment and process. They are dissimilar to biotech or software companies where significant value lay in intellectual property. Investment banks are not even like retailers, who have established distribution channels that may be difficult to replicate. As a matter of fact, even those things that are listed on the typical investment bank's balance sheet don't include the only real, true asset that any investment bank actually has. The only thing that they cannot do without.

Although investment banks may list many of these things on their balance sheet...

Deutsche Bank Consolidated balance Sheet 2015
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What is never carried on the financial statements, whether at book value or economic value, is the investment banks only real asset...

Deutsche Bank employees

You see, investment banks are nothing but licensed, leveraged capital and people. Licenses can literally be bought, and capital is sloshing around everywhere today - at negative yields to boot. So, the only thing that can differentiate a bank is its people. As industry culture would have it, Wall Street is notoriously highly (over)paid. Thus, when banks get in trouble (and that's exactly what DB has been in), they tend to cut head count. Since the industry pays about 50% of net revenues out in compensation, that amounts to a serious cost savings.

Wait a minute! In business, if you sell your assets to save money, exactly how do you make money? Hmmm...That's the conundrum that DB finds itself in. DB CEO John Cryan has prided himself in cutting costs and headcount, and he has. Look...

Deutsche Bank Cost to Income Ratio

... and he's succeeding in shrinking the company's balance sheet. Look...

Deutsche Bank Risk Weighted Assets

But... If you remember what I said in the intro, the only truly valuable asset of an investment bank is not even listed on its balance sheet. My Cryan is getting rid of these guys and gals, but he's really not saving any money! As excerpted from our paid subscriber report - pdf DB Earnings Review 4Q 2016 Feb, 2016 (1.07 MB):

'Nuff said.

Be aware, we can spend a lot of time analyzing this bank, and with the repeal (before it even began) of the Fiduciary Rule which required advisors of qualifies money to actually put their clients interests first (god forbid!) and the general disappearance of the sell side analysts (reference FT.com's Final call for the research analyst?), there are a lot of pitfalls for buyside institutions, institutional investors, and HNW parties to avoid and/or potentially fall into. DB is not easy to analyze correctly, and to be frank, they are loose and wild with their assumptions and reporting. Reference this glaring FIVE BILLION EURO, or so, error (to the upside, of course) in their published financial statements. Of course, not a single sell side analyst or investor has noticed this, because we're the only one's who ever looked at it, and we aren't analysts, we're investors!

Deutsche Bank Credit Risk
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Thus, there's likely little surprise that DB's credit rating is dropping faster than Donald Trump's stance in approval polls.

Deutsche Bank Long-Term Senior Debt Rating
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The only surprise may very well be how late to the party the ratings agencies are, yet again, when dealing with these banks.

We have created a 15 page summary analysis of DB's Q4 and full year results for paid subscribers. You can subscribe here. Current subscribers can access the report here - pdf DB Earnings Review 4Q 2016 Feb, 2016 (1.07 MB). As a backgrounder, our risk analysis report from last year can fill in many gaps - pdf Derivative Exposure of Global Banks (11.90 MB)

 

Author: Reggie Middleton

Reggie Middleton
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Reggie Middleton

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

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