Deutsche Bank pays out to plump up cheap shares

Portfolio strategists regularly proclaim the unpopularity of “value” investing, buying unusually cheap stocks. For evidence, look no further than European banks, which trade at an average price to earnings of around 6 times. The discount relative to the wider European market, at about 50 per cent, is the most in 20 years, points out UBS. Two of these “value” stocks are Deutsche Bank and BNP Paribas. Both reported full-year results on Thursday. Both may well stay cheap.

The market’s reception of their earnings varied greatly. Deutsche has struggled to gain acceptance from institutional investors for its cost-cutting plans and improving profitability. Despite a good run over recent months, its market value is some 60 per cent below tangible book value. That’s relatively low even compared to BNP at 0.7 times and Spain’s Santander at over 0.8 times.

On Thursday, Deutsche’s chief executive Christian Sewing lit up some fireworks. Cost-cutting plans are going so well that, with a little help from an improving macroeconomic situation, the bank will offer extra payouts to shareholders. Its dividend per share should hit €1 by 2025, more than triple that received for 2022. Share buybacks will pick up this year to €675mn, up by half over last year. Its share price bounced 6 per cent.

On the other hand BNP Paribas could only offer a negative tweak to its previous 2025 return on tangible equity target of 12 per cent, maybe half a point down. Nevertheless, generalist portfolio managers see BNP as a safe place to gain exposure to Europe’s banks. Given its premium rating, just a bit of bad news — one-off bank levies in Belgium — knocked its stock price 7 per cent.

While Deutsche’s chief executive offered a path out of the low valuation valley where its shares rest, BNP could only promise more of the same. The latter will invest for growth, while its German rival desperately wants to repay extremely patient shareholders with any excess capital available. However, Sewing’s payout offer could not disguise a still meagre return on tangible equity.

BNP may seem boring to some, but the French bank’s diminished low double digit outlook for ROTE in 2025 still beats its German rival’s hopeful medium-term target of more than 10 per cent. And that is nowhere near Santander’s bold 16 per cent goal for the coming year.

To Sewing’s credit, he could crow about an improved revenue target of €32bn by 2025, beating the bank’s previous goal of roughly €30bn. His desire to enthuse over an earnings inflection point is understandable. Even so, Deutsche remains a “show me” story for the average portfolio manager.