Barclays Plc & Deutsche Bank AG Shares: How Much Lower Can They Go?

After a tumultuous week for global banking, here are some worthwhile considerations for those looking at Barclays Plc (LON: BARC) and Deutsche Bank AG (ETR: DBK) shares.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in European banks have had a tumultuous week after concerns began to emerge over whether or not Deutsche Bank AG, Santander and UniCredit would be able to meet the cost of payments to bondholders over the coming months.

Markets became so panic-stricken by the middle of the week that investors actually bought, quite hilariously, into a rumour that the ECB was considering buying European banking stocks. This rumour was the source of Wednesday’s sharp, but temporary, recovery.

The above shares have been hammered hard, along with those of UK banks like Barclays (LSE: BARC), whose shares are down 29% year-to-date.

The bonds in question are AT1 capital securities, commonly referred to as coco’s, which convert from debt into equity when a prescribed trigger point is reached.

However, these bonds also allow the borrower to defer coupon payments when financial conditions make it necessary, in much the same way it would defer or cancel a dividend.

The problem

Legacy conduct costs have driven profitability into the ground for continental banks during recent years.

Just two weeks ago, Deutsche reported a record 6.8bn loss for the 2015 year, after earnings were wiped out by impairment charges and conduct costs. It also warned on the threat of further costs in 2016.

This has prompted analysts to begin looking at Deutsche’s reserves and liabilities for the year ahead.

Inevitably, some have voiced concerns that non-existent economic growth, fragile market conditions and ‘lower for longer’ interest rates could mean that capital quality deteriorates from here and eventually forces Deutsche into deferring coupon payments to bolster its balance sheet.

Your problem

Asides from the implications of another meltdown, Deutsche & Co’s woes are a problem for UK investors because it isn’t just European banks that have developed an appetite for coco bonds while being plagued by legacy conduct issues.

Barclays shareholders were left nursing a £174m loss at the close of 2014 after its £845m in post-tax profits was swallowed by coco bondholders.

Recalling that Deutsche’s current predicament arose from conduct costs, and considering that PPI 2.0 could be just around the corner for UK banks (see here for an explanation), a much more violent run on Barclays share price no longer seems such a distant prospect.

The takeaway

The investment case for bank stocks hinges on the cost-cutting ability of management teams as well as the eventual subsistence of conduct costs. But recent events have called into question whether we’ll see either of these contingents satisfied any time soon.

For an explanation on the cost saga, see this article detailing the most recent debacle at HSBC. For further information on the diminishing prospects of an end to litigation, see this linked article.

Bank valuations are shockingly low at present. Deutsche trades on just 0.35 times tangible book value, while Barclays is valued at 0.56 times. However, I can’t help but feel that sometimes, things are cheap or ‘undervalued’ for a reason.

Looking ahead, I believe many UK banks will struggle to cut costs further, while regulators clearly still have an axe to grind.

The net effect of this is a bleak outlook for earnings and cash returns to shareholders in my view.

It probably isn’t a good idea to still be hanging around when the rest of the crowd wakes up and sees these clouds rolling in.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Skinner has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing Articles

2 top shares I’ve bought for my Stocks and Shares ISA in November

This writer reveals a pair of fast-growing businesses that he's recently added to his Stocks and Shares ISA for the…

Read more »