The ongoing problem that is Deutsche Bank

Yesterday saw what might be called an old friend return to the fore. Back in the day I worked at Deutsche Bank or more specifically for Morgan Grenfell which it purchased. Also we have had reason to follow the story of it on here due to several factors. Firstly it is not only intrinsically linked to the German economy it is of course involved all over the Euro area economy as well as being a global bank. But also because it not only was hurt by the impact of the credit crunch and then of course by the Euro area crisis but a decade or so later from the former it has never really shaken off the view that things went very wrong. You could call it a balance sheet problem or a derivatives based one or a combination of both. Perhaps it is better to put it under the label of trust as in lack of.

Or to put it another way we have seen a form of official denial this morning and we know what to do with them! From Reuters.

“At group level, our financial strength is beyond doubt,” new CEO Christian Sewing said in a letter to staff, candidly admitting that the news flow around the bank was “not good”.

We of course know what to think when somebody tells us something is beyond doubt and if we did not this from the Financial Times helps us out.

My dear colleagues, the last few years were tough. Many of you are sick and tired of bad news. That’s exactly how I feel. But there’s no reason for us to be discouraged. Yes, our share price is at a historic low. But we’ll prove that we have earned a better valuation on the financial markets. We’ve achieved a lot we can be proud of. Now we need to look forward.

It would seem that those backing things with their money are not entirely clear about the “beyond doubt” financial strength as a share price at a historic low tends to indicate exactly the reverse. Also share prices are supposed to look forwards.

Number Crunching

This morning the relief around the actual formation of an Italian government plus no doubt some rallying of the fund management troops has seen the share price rise to 9.5 Euros. But this only corrects around half of yesterday’s 7% fall which saw it bottom at 9.06 Euros and close at 9.18. This compares rather badly with the 15.88 Euros at which it closed 2017 especially as we are supposed to be in a Euro boom. Compared to a year ago the share price is some 42% lower and those of a nervous disposition might do well to look away from the over 94 Euros of early 2007.

The price was lower back in the autumn of 2016 as we mull what “historic low” means? But banks are supposed to do well in the good times and yet Deutsche seems back in the mire. Or to put it another way Welt are pointing out that it was once the same size in terms of market capitalisation as JP Morgan whereas it has now fallen to one- sixteenth of it.

Across the pond

The Wall Street Journal has pointed out this.

The Federal Reserve has designated Deutsche Bank AG’s sprawling U.S. business as being in a “troubled condition,” a rare censure for a major financial institution that has contributed to constraints on its operations, according to people familiar with the matter.

It went on to explain what this meant.

The Fed’s downgrade, which took place about a year ago, is secret and hadn’t previously been made public. The “troubled condition” status—one of the lowest designations employed by the Fed—has influenced th bank’s moves to reduce risk-taking in areas including trading and lending to customers.

It also means the bank has had to clear decisions about hiring and firing senior U.S. managers with Fed overseers. Even reassigning job duties and making severance payments for certain employees require Fed approval, the people said.

In one respect this is a welcome move in that it is a regulator acting although we also need to note that the US Fed seems much more enthusiastic about such moves for foreign banks. After all at home it has just announced plans to ease the Volcker Rule.

The issue for Deutsche Bank is that this development calls into question its plans for the US. Is it even in charge of its operations and did it or the US Fed drive the announced changes?

In many ways this is one of the most damning things you can say about a bank.

The Fed also reupped its criticism of Deutsche Bank’s financial documentation. Examiners expressed frustration at what they described as the bank’s inability to calculate, at the end of any given day, its exposures to what banks and other clients it had in specific jurisdictions, and over what duration, some of the people said.

Standard and Poors

We have learnt over time that the ratings agencies are like the cavalry which arrived the day after the battle of Little Big Horn. But sometimes they do add a little value.

June 1, 2018–S&P Global Ratings today lowered its
long-term issuer credit ratings (ICR) on Deutsche Bank AG and its core
subsidiaries to ‘BBB+’ from ‘A-‘. The outlook is stable.

So stable that they are downgrading it? Anyway we get some detail as to why this has happened.

The lowering of our long-term issuer credit rating reflects that Deutsche
Bank’s updated strategy envisages a deeper restructuring of the business model
than we previously expected, with associated non-negligible execution risks……the bank
appears set for a period of sustained underperformance compared with peers,
many of whom have now finished restructuring.

Or to put it more bluntly you are in pretty poor shape if you are behind the sorry crew listed below.

By contrast, key peers such as
Barclays, Commerzbank, Credit Suisse, and the Royal Bank of Scotland (RBS)
have now worked through their restructuring and business model optimization
and are already starting to see improved performance.

Comment

The fundamental problem here in my opinion is the view held by many within it that Germany will always have at least two banks of which Deutsche Bank will be one. Even in the protected world of banking that is an extreme position. Combined with the credit crunch and then the Euro area crisis this means that it is time for the Cranberries.

Zombie, zombie, zombie, ei, ei
What’s in your head?
In your head
Zombie, zombie, zombie

It seems to have little clear purpose other than its own survival as it struggles from one crisis to the next. So far it emerges from each of them weaker than before but the official view mimics the “Tis but a scratch” of the Black Knight.

I note some reporting that the ECB says the turnaround is going well whereas I also note that things seem not so hot in a land down under.

Australia is preparing criminal cartel charges against the country’s third-biggest bank and underwriters Deutsche Bank and Citigroup over a $2.3 billion share issue, in an unprecedented move with potential implications for global capital markets. ( Reuters)

It’s a mistake……

These days even higher house prices do not seem to be enough. From its own research in January.

During the current real-estate cycle, i.e., from 2009 to 2017, house prices have risen 80% in large metropolitan areas (A cities) and c. 60% in B and C cities….The tight market situation has pushed house prices up even more strongly in
2017 than in the preceding years. According to bulwiengesa (which covers 126 cities), house prices rose c. 6 ½% and apartment prices more than 10% on average.

16 thoughts on “The ongoing problem that is Deutsche Bank

  1. So, Deutsche Bank cannot on any given day calculate its loan book and exposure by country, duration etc
    Just remind me why the bank is allowed to exist and, even more offensively, pay crazy salaries to “stop key talent leaving”?
    Btw, how does the value paid for Morgan Grenfell all those years ago compare with the whole market cap of DB?
    As I recall, Dresdner copied Deutsche Bank by buying Kleinwort Benson (my old shop) and that didn’t go too well either!

    • Hi James

      I found that rather extraordinary as it is one of the central tenets of banking. Even for say derivatives you need some sort of marking to market so you know where you stand. As for Kleinwort’s I remember walking past their offices and thinking they had made a mistake.

    • Deutsche Bank knows exactly where it stands, as do TPTB; it is horrendously, horrifically, humungously insolvent.
      Counting it = admitting it.

  2. So Deutsche bank is now 16 times smaller – would that shrinkage also apply to it’s once estimated stack of $47 trillion in derivatives, or is it all still on their books ? assuming that they can tell of course.

    • Hi Steve

      One of my main lines of work was valuing derivative books where you had to be ultra careful. Whilst we had computers then of course things were not like now and it should be much easier in many respects. However judgement is still required.

      As to your question in my opinion the derivative book may have shrunk a bit but nothing like the fall in market capitalisation.

      • Thank you for that Shaun & the rest of your seemingly tireless work.

        I have been reading of problems with banks IT in terms of relatively old systems using Cobal – there may be trouble ahead is the upshot of it – we shall see.

        • Having worked with banks and their COBOL systems for 25+ years I would posit, that after decades of error free processing it is not so much problems with mainframe/COBOL as a lack of qualified/interested staff to takeover and maintain the systems.

  3. This looks like a ticking derivatives time bomb.
    If this was a manufacturer and not a bank it would have gone long ago.
    The share price might be supported by Central Banks in the short term but there is a serious contagion risk from the debt ,the derivatives and the currency expansion.
    The financial and monetary systems are on life support there is no recovery and can be no recovery.
    The western economies are only being kept alive by the same thing that is killing them….more debt.

  4. Any thought’s on the Bank of England’s Blog post that house prices rising at accelerated levels are imperative to the economy and small to medium size business? That this model seems clearly unsustainable (never mind socially destructive) doesn’t seem to cross the minds of these ‘experts’

    • Hi PT and welcome to my corner of the online world

      That is an odd piece and I wish I could hand you over to my late father who being a small businessman had strong views on the subject. I cannot fully tell you his views as I would break my own rules on profanity on here! But suffice to say he would be hopping mad at such a misrepresentation and would also want recording the economic impact of those who were forced to put their house up for no good reason for a business loan. Still the banks spun a good line to the Ivory Tower.

      ” Of course, this makes a minor mockery of the limited liability that firms are supposed to enjoy. Yet, small firms are often opaque, reliant on a few key people, and lack their own tangible assets or steady cash flows to pledge to lenders. ”

      He found a 20 year track record was no help either.

    • I will. I applaud them.
      Shame our politicians regard our workforce lower than their corrupt post-career sinecures from international capital.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.