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On Nov 18, 2013, we downgraded our recommendation on Deutsche Bank AG (DB - Analyst Report) to Neutral from Outperform based on the disappointing third-quarter results. Results were adversely affected by litigation related expenses. Moreover, the regulatory reforms and an unsettled global economy might act as deterrents going forward.

Rationale Behind Downgrade

Deutsche Bank reported disappointing results in the third-quarter of 2013 aided by high legal expenses. Net income stood at €51 million ($67.5 million), substantially down from €754 million ($998.6 million) in the prior-year quarter. Additionally, the performance was also affected by rise in expenses and lower revenues.

With continuously rising non-interest expenses, the company is exposed to operational risks. Expenses surged at a CAGR of 11.3% over the last 5 years (2008–2012). Moreover, non-interest expenses increased 1% year over year in the first nine months of 2013. Continuation of such a trend will remain a hindrance for bottom-line growth.

Due to the nature of its business, Deutsche Bank is involved in litigation, arbitration and regulatory proceedings in Germany and a number of jurisdictions outside Germany. Such matters are subject to many uncertainties. Though the company has resolved a number of important legal matters and made progress on others, we expect the litigation environment to continue to be challenging.

For Deutsche Bank, over the last 30 days, the Zacks Consensus Estimate for 2013 decreased 2.3% to $5.85 per share, while it declined 1.3% to $6.82 per share for 2014. Currently, Deutsche Bank carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some foreign stocks that are currently performing well include Westpac Banking Corporation (WBK), Banco Santander, S.A. (SAN - Snapshot Report) and Itau Unibanco Holding S.A. (ITUB - Analyst Report). All 3 companies carry a Zacks Rank #1 (Strong Buy).

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