The Take

Deutsche Sank26/10/16

QUTEFS’ Events and Projects Director, Joshua Evans, takes a close look at the problems facing Deutsche Bank in this week’s edition of The Take:

One of the largest international investment banks, Deutsche Bank AG, has long been haunted by the ghosts of the 2008 Global Financial Crisis, where the German heavyweight required a Government bailout to remain afloat. Less than a decade later and some speculators believe that Deutsche may require another public bailout in the near future. This time around, Deutsche’s perceived weakness comes after a string of events that have shaved 50 percent of the company’s share price in the past year.

It all began when a handful of Deutsche employees were charged for manipulating the London Interbank Offered Rate (LIBOR) which cost the bank $US2.5 billion. As a precautionary response, Deutsche raised €12.5 billion in capital over 2013 and 2014. Two weeks after these charges were laid in late 2015, the bank was fined again for conducting transactions with countries under U.S. sanctions between 1999 and 2006. This business included 27,000 transactions valued at over $US10.86 billion with the restricted countries. As a result, Deutsche was fined $US57 million by the U.S. Department of Justice in November, 2015.

You would think the resilient Deutsche investors would have endured their fair share of bad news by this point, but think again. The bank entered 2016 by announcing a record loss of €6.8 billion for the year prior, causing even more investors to flee, including multiple hedge funds with significant holdings.

Despite all the negativity, the share price was supported for the first half of 2016 by public relations appearances and scaled back operations. However, this support was short-lived. The worries surfaced again when it became public that Deutsche had 40 times more debt than assets on its books, hedged with a potentially volatile derivatives portfolio valued at approximately $US46 trillion.

The blows kept coming at Deutsche in 2016, as their share price fell further on the Brexit vote because of their significant presence in London – Deutsche receives around 19 percent of its global revenues from the UK. Following this event historic event, the IMF identified Deutsche as the largest net contributor to systemic risks. One day later, the U.S. Federal Reserve announced that Deustche failed their stress test due to poor risk management and financial planning. Doubt in the German powerhouse continued to rise and the funds continued to leak.

The recent, worrying fine that Deutsche faced was from the U.S. Department of Justice to settle an investigation into mortgage-backed securities that the bank traded before the 2008 financial crisis. The US Department of Justice initially asked for $US14 billion, twice as much as the bank had set aside for litigation costs. This initial figure caused markets globally to tank, demonstrating the potential effects of a sequel to the Lehman Brothers. Fortunately for Deutsche Bank, their investors and the global financial system, this amount was negotiated down to $US4 billion – within the bank’s litigation budget.

A financial crisis, numerous fines, failed stress-tests, colossal derivative exposures, manipulating the LIBOR, losing multiple hedge fund investors, and a record annual loss has caused Deutsche’s share price to fall to just eight percent of its highest value in 2007.

Going forward, the survival of Europe’s largest bank, and in fact the global financial system, may be at risk if Deutsche cannot navigate through this uncertainty. To add to the worry, the German Chancellor, Angela Merkel, has made it clear that there will be no bail-out for the European behemoth this time around. This leaves Deutsche’s options limited to either raising more capital or finding a saviour in Commerzbank, Germany’s next largest bank, through an accelerated merger.

Whatever happens, times are going to be tough for all banks as their public image continues to tarnish and as they face further political and regulatory scrutiny.