Banking on Transformation

In the diverse world of global finance, the banking and financial services sector remains a fundamental pillar supporting economic development and stability. This sector, crucial for facilitating a wide range of economic activities, is in a constant state of evolution, adapting to new challenges and opportunities. Banks are essential in driving both large-scale economic initiatives and individual financial goals, underscoring their role in the broader economic landscape.

Central to this sector’s ongoing transformation is the gradual shift towards more integrated and technology-oriented operations. While traditional banking methods continue to hold value, there is a growing trend towards incorporating digital innovations. This shift mirrors a wider movement in the global economy toward more interconnected, technologically advanced approaches, aiming to meet the evolving needs of modern consumers and businesses.

Moreover, the industry is at a crossroads, facing both challenges and opportunities presented by global trends. The push towards sustainable financing, the integration of advanced technologies like AI in financial processes, and the critical importance of cybersecurity are reshaping the way financial services operate. These factors are driving change, fostering innovation, and creating new pathways for development and customer engagement.

Given these dynamics, the banking and financial services industry offers a solid investment opportunity, characterized by its robustness, capacity for adaptation, and prospects for sustained growth. It symbolizes the resilience and innovative spirit of financial institutions in a rapidly changing environment, poised to meet future demands and seize emerging opportunities.

Before we delve into the story of a key player in this field, let us set the stage with a short overview of the economy and markets and the Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days.

  • Later today, the Institute for Supply Management will release December’s ISM Manufacturing PMI. This report shows business conditions in the U.S. manufacturing sector. It is a significant indicator of the overall economic conditions. PMIs are considered to be one of the most reliable leading indicators for assessing the state of the U.S. economy, helping analysts and economists to anticipate upcoming economic trends.

  • On Friday, the ISM will publish December’s ISM Services PMI. This report shows business conditions in the U.S. services sector, which contributes almost 80% of the U.S. GDP. The ISM Services PMI is a forward-looking indicator, providing an important insight into the factors that influence GDP growth and inflation. PMI indices are leading economic indicators used by economists and analysts to gain timely insights into changing economic conditions since the direction and rate of change in the PMIs usually precede changes in the overall economy.

  • Also on Friday, the U.S. Bureau of Labor Statistics will release the all-important December’s Nonfarm Payrolls and Unemployment Rate reports. These reports present the number of new jobs created during the previous month, and the percentage of people who were actively seeking employment during the previous month. They are considered two of the most important economic indicators. Policymakers closely follow shifts in the job numbers, as they are strongly associated with the health of the economy as a whole. One of the Federal Reserve mandates is full employment, and it takes labor market changes into account when determining its policy decisions, which influence the capital markets.

As for the stock calendar, the Q4 2023 earnings season for Smart Investor Portfolio companies will begin next week. However, there are some companies whose fiscal year is shaped differently, and one of those firms, Lamb Weston Holdings (LW), will release its results tomorrow.

The ex-dividend date for Oracle (ORCL) is January 10th.


Today, we are adding the stock of one of Europe’s largest multinational investment banks, whose successful strategic reform has firmly put it on the path to strong profitability while helping it achieve the status of one of the safest banks in Europe.

To make room for this valuable addition, we are letting go of a small-cap digital advertiser with stellar finances and robust profitability, whose stock has been under pressure because of harsher conditions in its market.


New Addition: Deutsche Bank AG (DB)

Deutsche Bank AG is a German multinational investment bank and financial services company headquartered in Frankfurt. It is the largest bank in Germany, the eighth-largest in Europe, and the world’s 25th-largest bank by assets.

Deutsche Bank was founded in 1870 in Berlin, and in the years that followed it was strongly influenced by international political and economic developments as well as the volatile history of Germany. At the end of WWII, it was on the brink of the abyss and was forcefully broken up into ten region-level banks. With the formation of the Federal Republic (“West Germany”), the bank was able to regroup in two stages, finally re-merging into one bank in 1957, with its headquarters in Frankfurt, Germany.

After Deutsche Bank was re-established, it succeeded in readopting its traditional role in international financing and entering into new lines of business in Germany. In the 1970s, Deutsche Bank began to take shape as a global group, expanding to other European countries and the U.S. through acquisitions, as well as through an internal drive led by the evolution of financial markets and technological progress.

The nineties were marked by additional acquisitions and the establishment of subsidiaries abroad, capitalizing on the political transformations in Eastern Europe and Asia’s emerging markets. Since the 1990s, international investment banking accounted for an ever-increasing share of Deutsche’s business, as globalization facilitated capital market interconnectedness, while the liberalization of financial markets and technological innovation opened new opportunities for growth.

DB’s global expansion culminated in the acquisition of the New York investment bank Bankers Trust in 1989, which opened the American market up to Deutsche Bank. The bank continued its U.S. expansion in the following years, and in 2016 consolidated its operations in the country under the umbrella of Deutsche Bank USA Corporation, which acts within the U.S. regulation as an American banking institution. In 2001, DB’s shares were listed on the New York Stock Exchange; since then, the bank’s stock has been dual-listed on the Frankfurt Stock Exchange and the NYSE.

Deutsche Bank was heavily hit during the Global Financial Crisis (GFC) of 2008 following its involvement in the U.S. mortgage-backed derivative trades in the years leading up to the crisis. After the crisis, the bank successfully restructured, cleaning up its balance sheet and strengthening its capital base, which helped reinstate its reputation as one of the leading global financial institutions. Today, DB ranks 15th in the list of the safest banks on the continent, according to financial stability, diversification and risk management, transparency, and other important metrics.

Deutsche Bank commands a market capitalization of $27.7 billion and has a workforce of almost 90,000 employees in ~1,500 offices and branches in numerous countries across all continents. The bank provides financial services to companies, governments, institutional investors, small and medium-sized businesses, and private individuals.

DB operates through four main divisions: Corporate Bank, Investment Bank, Private Bank, and DWS Asset Management.

Deutsche Bank’s Corporate Bank division provides liquidity management, trade finance and lending, trust and agency, foreign exchange, and securities services, as well as risk management solutions. It works with corporate clients, financial institutions, investors, and debt issuers around the globe. The division also supports German small businesses and self-employed business owners with payment and credit solutions, as well as other banking services. This division is responsible for 22% of Deutsche’s total annual revenues.

The Private Bank division provides payment and account services, credit and deposit products, as well as investment advice products, such as environmental, social, and governance products. This segment also provides banking, wealth management services, postal and parcel services. It offers support in planning, managing, and investing wealth, financing personal and business interests, in addition to servicing institutional and corporate needs in Germany and internationally. This division is responsible for 33% of the bank’s total annual revenues.

The Investment Bank division offers debt origination, merger and acquisitions, and equity advisory services, as well as extended research capabilities, to major corporates, financial institutions, financial sponsors, and sovereign clients around the world. The segment generates 36% of DB’s total revenues, the largest portion. The division’s contribution to total revenues has been steadily increasing since 2019, as its business benefitted from market volatility. However, following the increase in interest rates in Europe and the world, the relative contribution of the Corporate and Private segments has been rising, a trend that is expected to continue as revenues from traditional lending remain on an upward trajectory.

The DWS Asset Management, with its almost $1 trillion in AUM (assets under management), is one of the world’s leading asset managers, offering individuals and institutions access to its strong investment capabilities across all major asset classes. It provides numerous investment solutions, including active, passive, and Alternative asset management, as well as various other services, including insurance and pension solutions, asset liability management, portfolio management solutions, and asset allocation advisory services to individuals and institutions. The DWS segment currently generates about 9% of total annual revenues.

In 2019, Deutsche Bank announced a radical strategic restructuring program, aimed at transforming its business model to become more profitable, improving shareholder returns, and driving long-term growth. The program included exiting the Equities trading business and significantly reducing risk-asset allocation in Corporate and Investment Banking segments. These actions were designed to allow Deutsche to focus on its core businesses of Corporate Banking, Financing, Foreign Exchange, Origination & Advisory, Private Banking, and Asset Management.

Within the program, the bank downsized its branch number and workforce, with these cost-cutting measures helping fund the business transformation from its existing resources without requiring additional capital. The restructuring efforts started paying off within a short period, reflected in a sharp upturn in net income from 2020 onward. In 2022, the German bank reported its highest annual profit, both before and after tax, since 2007. Its 2022 net income of $5.5 billion surged 160% from the previous year.

The bulk of the transformation was completed by summer 2023, which resulted in a more stable and diversified business model, albeit with a still significant contribution from more volatile capital market activities. The bank’s asset quality, capitalization, and liquidity have been strengthened, while profitability was substantially improved.

The restructuring also helped substantially strengthen Deutsche’s financial health, with the metrics relevant to the financial institutions showing strong improvement. It has a strong balance sheet with a moderate Assets-to-Equity ratio, a low Loans-to-Assets ratio, and an appropriate Loans-to-Deposits ratio.

Deutsche Bank’s debt is very highly rated, standing among the highest-rated banks in Europe: “A” at Standard & Poor’s, “A1” at Moody’s, and “A-” at Fitch. Particularly, Fitch said that the high credit rating reflects the success of DB’s restructuring efforts, resulting in a more diversified business profile, improved risk controls, resilient asset quality, adequate capitalization, diversified funding, sound liquidity, and improved earnings. Moody’s, which upgraded the bank’s rating in October 2023, also applauded its “successfully achieving its transformation plan,” as well as its “reduced reliance on market funding and high-quality deposit base,” as well as its “prudent and well-controlled risk appetite that is likely to result in a sound and relatively stable asset quality through the cycle.” Furthermore, the agency praised DB’s improved leverage ratio and “solid capital and liquidity metrics, additionally supporting its improved credit profile.” The latest credit-rating agency to upgrade DB’s rating was S&P Global Ratings, which in December 2023 highlighted Deutsche Bank’s progress in “growing its franchise, strengthening its earnings, and maintaining solid capital and liquidity profiles.”

The bank’s strengthened capital profile and improved stability helped it to overcome the global tumult at financials back in March 2023. After the investor sentiment took a hit from the collapse of Silicon Valley Bank and two other U.S. lenders, it was further impacted by the emergency rescue of the failing Credit Suisse by UBS. The market panicked over contagion concerns and worries about the stability of the European banking sector. While all financial firms, including Deutsche, saw their shares tumble in the wake of the crisis, analysts and regulators dismissed any concerns regarding DB, pointing to the bank’s robust capital and liquidity positions.

On October 25, Deutsche Bank reported its Q3 2023 financial results, with the revenues in line with analysts’ estimates and EPS exceeding their outlook. Third-quarter profit before tax rose 7% year-on-year, while post-tax profit declined by 3%, reflecting a higher tax rate. Net revenues were up 3% year-on-year, with the Corporate and Private segments continuing to offset weaker Investment Banking and Asset Management results.

Specifically, the Corporate division grew its revenue by 21% year-over-year, benefitting from significantly higher margins, while Private Bank revenues increased by 9%. Meanwhile, Investment Banking revenues were down 4%, primarily due to lower revenue from fixed income and currency trading. The DWS revenues fell 10% despite positive inflows into AUM during the quarter, mainly because of lower performance fees and foreign exchange rate movements.

Capital position strengthened in Q3, with the Common Equity Tier 1 capital ratio rising to 13.9% from the prior year’s 13.3%, and substantially above the bank’s 2025 capital objective of around 13%. This development reflected the positive impacts of organic capital generation from net income, benefits from data and process optimization as part of the bank’s capital efficiency measures, and lower credit-risk RWAs (risk-weighted assets). Liquidity improved further, with the Liquidity Coverage Ratio increasing to 132%, far above the regulatory requirement of 100%.

Q3’s results were robust overall, the bank’s 13th consecutive profitable quarter. In the first nine months of 2023, the bank’s net revenues rose 6% year-on-year, and a compound annual growth rate of over 6.9% in the twelve months prior to September 30, 2023, above the bank’s target of 3.5% – 4.5%. As a result, the bank’s management has lifted its revenue guidance for the full year 2023, with the expected top line coming in at about $31.8 billion, at the top end of prior estimates.

As a result of better-than-expected performance and improved outlook, in the past 12 months Deutsche Bank’s U.S.-traded stock has outperformed its U.S. peers, as represented by the Financial Select Sector SPDR Fund (XLF). DB’s shares rose by 16.6% in this period, while XLF increased by 9.5%. In the past three years, their performance has been similar, with DB gaining 25.5% and XLF returning 27%.

Despite its recent outperformance, DB’s stock is trading at modest valuations, with its TTM P/E of 5.7 and a Forward P/E of 8.3 representing 48% and 25% discounts, respectively, to the Financial sector’s averages. While European equities historically trade at a discount to their U.S. counterparts, Deutsche Bank is inexpensive also when compared to its European peers, coming closer to the lower end of the price range. The bank is currently trading at a ~45% discount to its fair value.

TipRanks-scored top Wall Street analysts see an average upside of 29.5% for the stock in the next 12 months. DB carries a TipRanks Smart Score rating of “Perfect 10” with a “Moderate Buy” recommendation:

Apart from stock increases, Deutsche Bank compensates its shareholders through dividends and buybacks. It has been paying annual dividends since 2009, increasing the payouts each year since 2019. DB’s current dividend yield of 2.26% is higher than the average level for the U.S. Financial sector, which is uncommon for foreign enterprises.

Dividends are an important part of Deutsche’s capital allocation strategy, with the objective to distribute $8.8 billion to shareholders through 2025. These distributions include generous share repurchases within its buyback programs. In July 2023, the bank’s management approved an additional buyback capacity of $493 million by the end of 2023. In Q3 2023, DB repurchased 27.5 million shares for a total consideration of approximately $297 million.

To conclude, we believe that the reformed Deutsche Bank will continue to deliver strong results, which coupled with its sound management, strong alignment with shareholder interests, and low valuations, position it as a compelling combination of value, quality, and income. As such, we view it as a valuable addition to the Smart Investor portfolio.

To make room for this valuable addition, we are letting go of a small-cap digital advertiser with stellar finances and robust profitability, whose stock has been under pressure because of harsher conditions in its market.


New Deletion: Perion Network (PERI)

Perion Network Ltd. is a global technology company, providing advertising solutions to brands, agencies, and publishers through innovative digital platforms. Perion delivers a digital advertising ecosystem, providing its clients with a holistic ability to identify and reach their customers across all channels. Perion operates across the three main pillars of digital advertising – ad search, social media, and display/video/CTV.

Perion is headquartered in Israel, with offices in Paris, New York, London, Chicago, Boston, Kyiv, Barcelona, and Seattle. The company was founded in 1999 and has been publicly traded on the NASDAQ since 2006 and on the Tel-Aviv Stock Exchange since 2007.

Perion is a very well-run company, business-wise as well as financially. It has performed more than 10 strategic acquisitions and developed a vast range of technological solutions without taking on any debt (it is debt-free). The company displays pristine financial metrics, while its quarterly reports reflect stellar performance, with numerous consecutive quarters of double-digit EPS growth.

However, its stock performance has been underwhelming. As a small-cap company, it is more volatile than its larger peers; besides, its stock was hit at the onset of Israel’s war with Hamas that began in October. However, PERI’s stock’s current stretch of declines began long before that, right after it reached an all-time high back in April.

The underperformance of the stock  stems from the weaker outlook for the digital ad market for the next three years. After the post-pandemic spike, the digital ad market has normalized, reaching a steady rate of growth of about 10%, which is expected to continue at least until 2027. These rates of growth are a disappointment to investors, leading to a change in sentiment towards the industry as a whole.

Meanwhile, the competition in the ad-tech market is becoming stiffer, posing additional challenges to companies in this sphere, with even more difficulties faced by the smaller players as the tech giants like Google (GOOGL), Amazon (AMZN), and Meta (META), offer similar ad services while having more resources, data, and influence to steal large chunks of the market share. The challenges of stiffer competition in a slower-than-before market have been reflected in PERI’s slowing rate of revenue growth over the last several quarters.

Perion remains a very well-managed, productive, and profitable company with a diversified and innovative portfolio, whose stellar finances and robust cash-generation abilities will allow it to successfully grow its business in almost any economic circumstance. However, it now faces some headwinds in a more difficult market, which are expected to weigh on its stock performance in the next few quarters. We may re-evaluate the company in the future, but for now, we see it as appropriate to sell the stock.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets have wobbled coming into the new year, and the Winners Club has lost two of its prominent members, as WCC, and ORCL fell through the 30% floor. However, they are not far from the threshold, and we expect these two great companies to return to the ranks of Winners.

Meanwhile, the Winners Club now includes four stocks: GE, AVGO, ANET, and CDW.

The next in line to enter our exclusive club is now WCC with a 29.4% gain since purchase, closely followed by ORCL with a 27.7% increase. Will one of them make it back into the Club next week, or will someone else outrun them to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, January 10th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
DB Jan 3, 24 $13.61

New Portfolio Deletions

Ticker Date Added Current Price % Change
PERI May 17, 23 $30.33 -2.98%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $125.95 +125.39%
AVGO Mar 22, 23 $1085.38 +72.03%
ANET Jun 21, 23 $231.56 +52.83%
CDW Jun 29, 22 $220.67 +39.59%
WCC Sep 14, 22 $173.54 +29.35%
ORCL Dec 21, 22 $104.06 +27.68%
STLA Sep 6, 23 $23.05 +26.93%
GD Dec 22, 21 $258.60 +26.91%
MOH May 3, 23 $371.53 +24.04%
ITT Oct 18, 23 $116.93 +22.43%
ULTA Nov 15, 23 $486.61 +20.11%
CHKP Jul 19, 23 $152.27 +19.60%
VRTX Aug 2, 23 $410.91 +18.17%
JBL Jul 5, 23 $128.14 +17.36%
AMAT May 31, 23 $154.37 +15.81%
CI Jul 12, 23 $310.10 +15.41%
PH Oct 11, 23 $458.61 +15.28%
ACN Aug 16, 23 $346.92 +12.77%
SMCI Nov 8, 23 $285.45 +11.77%
UNH Apr 19, 23 $539.34 +10.93%
CXT Oct 25, 23 $57.09 +10.30%
APH Aug 9, 23 $96.83 +9.49%
STM Sep 13, 23 $48.35 +9.46%
TSM Aug 23, 23 $101.53 +8.25%
TXT Nov 29, 23 $80.43 +4.58%
AIT Dec 6, 23 $170.36 +3.41%
EME Nov 1, 23 $212.78 +3.11%
DE:IFX Apr 5, 23 $36.48 +2.78%
MCK Dec 13, 23 $473.42 +2.44%
HUM Dec 20, 23 $470.10 +1.41%
EA Nov 22, 23 $135.78 -0.73%
LW Apr 13, 23 $106.56 -1.49%
EG Oct 4, 23 $361.65 -3.09%
ENS Dec 27, 23 $98.73 -4.80%



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