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JP Morgan Rumors a Glimmer of Hope Amongst Deutsche Bank's (DB) Woes

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Shares of Deutsche Bank (DB - Free Report) rose as much as 5% Friday morning after a German magazine reported that JPMorgan (JPM - Free Report) , along with Industrial and Commercial Bank of China may take a stake in the troubled bank. However, a JPM spokesperson quickly spoke out and denied the report, removing some of the gains on the stock but still leaving it green on the day.

A Turbulent Stretch

DB has been underperforming in recent years, down nearly 40% in the last twelve months alone compared to a 3.4% increase across the financial services industry, shown here:

Last week, its US subsidiary was the only major bank to fail the second part of the Federal Reserve’s annual stress tests due to “widespread and critical deficiencies” in its capital planning controls.

The bank has been hurt by the sluggish growth of the European economy and lowered (and even negative) interest rates, which have been eating into its margins. In response to difficult operating conditions, DB has begun restructuring, announcing in May that it would axe 7,000 investment banking jobs and lay off 25% its equities sales and trading workforce. Doing so will reduce its investment bank’s leverage exposure by 10% overall, or over $117 billion.

Deutsche Bank plans to shift its focus to businesses in which it has a leading market position, including global payments and foreign exchange markets. It will scale back other areas in which management feels it no longer has a competitive advantage due to the changed market environment. This means that the company will reduce its operations in the US and focus on European clients in an attempt to improve its balance sheet.

In April, former CEO John Cryan was removed from his position ahead of his planned termination in 2020 due to shareholders’ loss of belief that he can turn the bank around. Christian Sewing was named his replacement and has already begun making difficult choices, including the few mentioned above.

DB is coming off a disappointing Q1 earnings report, posting net income of $147.5 million, plunging 79% on a year-over-year basis. It saw net revenues of $8.6 billion, representing a 5% year-over-year decline. Earnings came in at $0.07 per share.

Deutsche Bank’s net margin of -3.3% is a further testament to the fact that it is hurting, especially when compared to the industry average of 18.9%.

Outlook

Although the bank has had a difficult stretch, its restructuring initiatives should help it start moving back on track. By offloading unprofitable businesses, such as those in Portugal and Mexico, and focusing on its core clientele in Europe, DB can remove excess baggage and improve margins. While it will take a considerable amount of time and work, DB can still see light at the end of the tunnel.

Still, for investors, it is probably a better idea to sit back and monitor the bank rather than buy in. Based on recent earnings estimate trends, Deutsche Bank currently sits at a Zacks Rank #5 (Strong Sell). While things can get better in the long run, for now investors should consider directing their attention and capital elsewhere.

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