Deutsche Bank Crisis

Deutsche Bank Historical stock prices in EUR (€)

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Deutsche Bank’s stock price has nearly halved since the beginning of 2015. The stock was trading at €12.30 on Nov 4, 2016. The company also posted a negative EPS of (€ 5.06) for the year 2015. The company’s S&P’s rating downgraded to ‘BBB+’ in 2015 from ‘A’ in 2014 and Fitch ratings downgraded from ‘A+’ to ‘A-‘. The bank was forced to suspend dividend payouts in 2015 to allow it to build up its cash reserves.

Problems with Deutsche Bank:

Negative interest rates:

Deutsche and other European banks have been struggling with negative interest rates, which are squeezing profits. Eurozone credit growth is still limp despite the ECB’s negative interest rate policy.

Huge exposure to the derivatives market:

Deutsche has the world’s largest so-called derivatives book, its portfolio of financial contracts based on the value of other assets in the world. It peaked at over $75 trillion, about 20 times German GDP, but had shrunk to around $46 trillion by the end of 2015. That’s around 12% of the total notional value of derivatives outstanding worldwide ($384 trillion), according to the Bank for International Settlements. Those hedges can fail, especially when, as was the case back in 2008, the likes of Lehman and AIG either failed or looked like they would.

Net loss of €6 billion for Q3 2015:

The company posted a huge loss of €6 billion for Q3 2015 which was mainly driven by billions of dollars in write-downs of the value of investment-banking and other assets. The company had announced plans to lay off 35,000 people shortly after announcing the quarterly loss and also announced plans to reduce its number of branches worldwide.

Fine of $14 Billion imposed by US regulators:

As a punishment for its role in the 2008 crisis, the Obama administration has sought a series of stiff fines against banks that allegedly sold bundles of low-quality mortgages without fully informing customers of the associated risk. Deutsche Bank faces one of the biggest fines and is expected to negotiate with the US regulators to settle the fine to $5.4 billion. In November 2015, the bank agreed to pay a $258 million fine for violating US sanctions laws.

Failed the US regulatory “Stress Tests”:

European and American regulators have performed a series of “stress tests” to try to predict how banks will fare in the event of another economic downturn. If banks fail these tests, they’re required to beef up their reserves. The US fed failed Deutsche in this year’s stress tests, for the second year in a row, saying it had “substantial” weaknesses in its capital planning. Deutsche Bank has been one of the worst performers in these tests, and last year it was forced to suspend dividend payouts to shareholders to allow it to build up its cash reserves.

Problems to the International Economy:

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The International Monetary Fund warned in a late June report that since the bank is heavily intertwined with the rest of the global financial system it appears to be “the most important net contributor to systemic risks” among Global Systemically Important Banks (GSIBs), followed by HSBC Holdings Plc and Credit Suisse Group AG. Since Deutsche bank does business with many Banks, NBFCs, Mutual funds and Insurance companies around the world a bankruptcy of such a large bank would definitely trigger a financial crisis as many people would lose their jobs and their hard earned savings.

Regulatory updates:

No bail-out this time, but a bail-in is possible:

Ever since the 2008 financial crisis, policymakers in both the US and Europe have been trying to change the rules to make another bailout unlikely. European rules prohibit national governments from providing a no-strings-attached bailout. They can allow for a “bail-in” where the creditors and depositors take a loss on their holdings to rescue the financial institution instead of the government using the taxpayers’ money to save the bank. Angela Merkel has vowed not to use German taxpayer money to rescue Deutsche Bank.

Is Deutsche Bank on a verge of a crisis?

A positive Q3 2016 for Deutsche Bank:

Third-quarter net income was €278 million, beating analysts’ average expectations for a net loss of around €610 million. The bank’s restructuring and litigation costs for the third quarter were lower than analysts had expected, in part because employee compensation dropped. Revenue from trading, especially in credit and interest-rate products, was stronger than a year earlier, offsetting weakness in equities trading within the lender’s important global markets business.

The German lender earmarked an additional €501 million in the third quarter for litigation costs (costs for legal expenses). Deutsche Bank’s common equity Tier 1 capital ratio, a measure of financial strength, increased to 11.1% from 10.8% in the second quarter. The lender is working to boost that ratio to at least 12.5% by 2018. Deutsche Bank ended the third quarter with €200 billion of liquidity reserves. Analysts say that the liquidity position is still strong, and not a central concern.

The lender has ramped up cost-cutting plans, and is still planning to dispose of its burdensome German retail-banking unit called Postbank. It also agreed to sell its U.K. insurance unit Abbey Life Assurance Co., a move which will boost the bank’s Tier 1 capital ratio by about 10 basis points.

2015 marked the start of a multiyear cost-cutting and turnaround plan under then-new CEO Mr. John Cryan (Effective Jul 1, 2015). The group has undergone restructuring of its business divisions.

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Sources:

https://www.fdic.gov/about/learn/board/hoenig/capitalizationratio2q16.pdf
http://www.bloomberg.com/news/articles/2016-09-28/why-people-have-been-worrying-about-deutsche-bank-in-12-charts
http://www.vox.com/new-money/2016/10/4/13124402/deutsche-bank-problems-explained
http://fortune.com/2016/09/27/deutsche-bank/
http://www.wsj.com/articles/deutsche-bank-swings-to-profit-1477546211

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