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MarketScreener Homepage  >  Equities  >  Xetra  >  Deutsche Bank AG    DBK   DE0005140008

DEUTSCHE BANK AG

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German Business Stars Lose Luster -- WSJ

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07/13/2019 | 02:49am EDT

By Sara Germano

BERLIN -- German efficiency has taken a hit this year as many of the country's most recognizable corporate names wrestle with a slowing local economy, questionable business decisions and trouble shifting to a digital world.

In the past week, Deutsche Bank AG abandoned its global ambitions and initiated layoffs, and the chief executive of BMW AG said he would step down. Profit warnings from BASF SE and Daimler AG -- which issued its second in less than a month on Friday -- have rattled markets.

Those setbacks add to a worrisome mix that includes Bayer AG's legal trouble with its acquisition of Monsanto, the maker of weedkiller Roundup, and the challenge to German auto makers from a depressed global car market and continued fallout from the diesel-emissions scandal. Meanwhile, German blue chips -- from software maker SAP SE to industrial giant Thyssenkrupp AG -- have announced tens of thousands of job cuts combined this year.

Roughly one in three large public companies in Germany's DAX index have reported profit warnings, job cuts or restructurings, or are dealing with formidable legal disputes or investigations from authorities. Firms based here are slipping from the ranks of the world's most-valuable companies, leading consulting firm Ernst & Young to conclude this month that "German companies are losing their importance."

While specific challenges loom large for some companies, broad trends are also working against them. Analysts cite the effects of global trade disputes on Germany's export-oriented economy, the increased pressure to digitize and a degree of complacency after years of robust growth.

"There is a crisis at the moment. The German economy was so good for such a long time, people thought we'd go on and go on and go on," said Markus Schön, managing director of DVAM Asset Management in Detmold, Germany.

The nation's economy grew just 0.7% in the 12 months through March, far behind others in the eurozone, and Berlin earlier this year slashed its growth forecast for 2019 gross domestic product to 0.5% from 1.8%. "German companies were not prepared for this situation," Mr. Schön said.

German auto makers, in particular, have been blindsided. The collapse in demand for diesel vehicles because of emissions curbs and a global slowdown in car sales have hit them at a time when they are spending heavily on electric and autonomous vehicle development.

BMW as well as Mercedes-Benz maker Daimler have lowered their financial guidance this year, while Volkswagen AG announced it would cut 7,000 jobs. In turn, the difficulties of large car makers have filtered down through a network of smaller suppliers and service providers in the country.

Volkswagen was at the center of an emissions-cheating scandal that surfaced in 2015, and it is still feeling the effects. In March, the U.S. Securities and Exchange Commission sued the auto maker and former Chief Executive Martin Winterkorn, alleging they defrauded U.S. investors. And a month later, German prosecutors indicted Mr. Winterkorn and four others, accusing them of fraud.

Volkswagen called the SEC complaint "legally and factually flawed" and said it would contest the charges. A lawyer for Mr. Winterkorn declined to comment at the time of the charges and didn't respond to a request for comment Friday.

Other German companies say their problems are closer to home. Last month, days after Deutsche Lufthansa AG said aggressive competition from European low-cost carriers hurt its profit, Chief Executive Carsten Spohr acknowledged that the airline had made missteps navigating the local short-haul market, including efforts to capitalize on the 2017 bankruptcy of rival Air Berlin.

"Did we underestimate the complexity? We did," he said. In an effort to reassure investors, Mr. Spohr affirmed the company's commitment to being dependable and efficient. "In the end, we're boring. We're German."

Another contributor to German corporate troubles is the country's legally mandated board structure -- which flanks the management board with a powerful supervisory board, half of whose members represent workers. While such checks and balances have helped maintain labor peace at large companies, they can also inhibit quick decision-making and discourage risk-taking.

"It can be an advantage to have a strong CEO, who can react quickly in times of crisis," said Christian Lawrence, a partner at consulting firm Brunswick Group in Munich. "Whereas if you have a German system, the CEO is one of many making decisions and there must be consensus for things to be done."

Hubert Barth, chief executive of Ernst & Young Germany, said some German blue chips aren't keeping pace with the transformation of the economy toward "more digitized business models."

German companies and the government espouse a commitment to digitization. This week, German economics minister Peter Altmaier traveled to Silicon Valley to meet with executives from Alphabet Inc.'s Google, Apple Inc. and others, part of a continuing effort to raise Germany's profile in digital industry.

At the same time, there is a pervasive feeling, analysts and executives say, that German companies can't keep up with the tech giants from the U.S. and elsewhere. One impediment is the strong limitation that German and European privacy laws put on companies' ability to collect, store and monetize user data.

"Tell me one company in Germany which is playing a role in platforms, the area of Facebook and Amazon," said Mr. Barth of Ernst & Young. "There's no obvious German company that plays a significant role."

In May, executives from Bertelsmann SE met to discuss ways the media conglomerate can work with, and compete against, American tech companies.

"We will never be able to gather the same amount of data as Google, Facebook or Amazon," said one executive at the meeting. "This is a fact, and we just have to deal with it. They are on their own planet."

The performance of Germany's large companies isn't a perfect measure of the health of the national economy. While the country is home to many global brands, the backbone of its industry is the vast number of small- and midsize private businesses known as the Mittelstand.

Those traditionally family-owned private firms haven't encountered the same challenges as large public companies, Mr. Lawrence said, in part because their management system is less complex and they aren't subject to the restrictions of the public market.

But this economic structure has other negative consequences. According to a report from the International Monetary Fund this week, about 60% of corporate assets and profits in Germany are generated by closely held firms, contributing to rising wealth inequality in Germany, the biggest divide in Europe behind the Netherlands and Austria.

"The concentration of privately held and publicly listed firm ownership in the hands of industrial dynasties and institutional investors is especially prevalent in Germany," the IMF report said.

Write to Sara Germano at sara.germano@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BASF SE 0.24% 58.12 Delayed Quote.-4.02%
BMW AG -0.22% 60.25 Delayed Quote.-14.63%
BMW VZ -0.85% 48.78 Delayed Quote.-20.81%
DAX 0.05% 11710.94 Delayed Quote.10.95%
DEUTSCHE BANK AG -0.35% 6.295 Delayed Quote.-9.20%
SAP AG -0.13% 107.78 Delayed Quote.24.21%
THYSSENKRUPP AG 0.08% 9.736 Delayed Quote.-35.14%
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Financials (EUR)
Sales 2019 23 756 M
EBIT 2019 -1 297 M
Net income 2019 -5 289 M
Finance 2019 10 342 M
Yield 2019 -
P/E ratio 2019 -2,67x
P/E ratio 2020 33,6x
EV / Sales2019 0,11x
EV / Sales2020 -0,39x
Capitalization 13 063 M
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Mean consensus UNDERPERFORM
Number of Analysts 27
Average target price 6,60  €
Last Close Price 6,35  €
Spread / Highest target 41,8%
Spread / Average Target 4,10%
Spread / Lowest Target -37,0%
EPS Revisions
Managers
NameTitle
Christian Sewing Chief Executive Officer
Karl von Rohr Co-President & Chief Administrative Officer
Garth Ritchie Co-President & Co-Head-Corporate & Investment Bank
Paul Achleitner Chairman-Supervisory Board
Frank Kuhnke Chief Operating Officer & Member-Management Board
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