DB - Deutsche Bank downgraded to Underperform at BofA on limited RoTE prospects

Deutsche Bank ( NYSE: DB ) stock slid 2.8% in Friday morning trading after Bank of America analyst Rohith Chandra-Rajan downgraded the stock to Underperform from Neutral on the basis that weak profitability and regulatory headwinds are likely to limit its return on tangible equity to 6%-7%.

The bank is "struggling to improve profitability as growth is heavily volume reliant, consuming cost and capital resources," the analyst noted. Higher volume implies more cost in addition to underlying inflation.

The analyst expects Deutsche Bank's ( DB ) core bank growth to slow to 3% a year in the 2022-2025 timeframe from 5% a year growth during 2019-2022.

Efficiency improvements should limit annual cost growth to 1%-2%, he said. "That's below revenue growth, so efficiency continues to improve, but leaves the cost: income a little over 70% in 2025E," Chandra-Rajan wrote in a note to clients. "The resulting low earnings generate ~100bp of capital a year, of which we expect ~40% to be consumed by each of growth and regulation, leaving 20% and a little surplus capital for distribution."

Chandra-Rajan's rating is more bearish than the S A Quant rating , and the average Wall Street rating , both at Hold.

SA contributor Pearl Gray Equity and Research says not to worry about DB's Q4 earnings miss.

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