Deutsche Bank and RBS continue to headline the zombie bank era

A feature of the credit crunch era has been like an episode of Hammer House of Horror. This has been the march of the Zombie banks where a burst into normal life is always promised but never seems to actually arrive. More than a decade later in some cases we find ourselves observing them still being on the march. Apart from problems which this raises for shareholders there are three big issues from this. The first is economies which are tilted towards the preservation of what in Lord of The Rings style we have named “The Precious” which we can see in two ways. One is economic policy which the European Central Bank is demonstrating by responding to the Euro area economic slow down with yet another banking subsidy called the TLTRO. The other is the way that bank profits are privatised and losses socialised by the way that the UK still has some £555 billion of gross debt and £305 billion of net debt on its books from the bank bailouts. Third is the effect of Zombification itself as described by the Bank for International Settlements last September.

Using firm-level data on listed firms in 14 advanced economies, we document a ratcheting-up in the prevalence of zombies since the late 1980s. Our analysis suggests that this increase is linked to reduced financial pressure, which in turn seems to reflect in part the effects of lower interest rates. We further find that zombies weigh on economic performance because they are less productive and because their presence lowers investment in and employment at more productive firms.

It is of note they think this has been going on for over 30 years although as the central bankers bank they may well be trying to deflect us from the growth of banking zombies over the past decade.

Two clear cases of zombiefication have been Royal Bank of Scotland and Deutsche Bank and the last 24 hours has brought a flurry of news on both. So let us start with my old employer which is the main bank in Germany.

Deutsche Bank

Here is the BBC from yesterday explaining things which we knew all along.

Deutsche Bank and Commerzbank have abandoned merger talks, saying the deal would have been too risky.

Both banks said the deal would not have generated “sufficient benefits” to offset the costs of the deal.

The German banks only entered formal merger talks last month.

The German government had been supporting the tie-up, with reports saying Finance Minister Olaf Sholz wanted a national champion in the banking industry.

It is interesting how Too Big To Fail or TBTF is now apparently being a “national champion” isn’t it?

Combined, the banks would have controlled one fifth of Germany’s High Street banking business with €1.8 trillion ($2tn; £1.6tn) of assets, such as loans and investments.

The real issue all along was not the assets but the liabilities especially at Deutsche Bank! Anyway perhaps someone at the BBC has a sense of humour.

The deal was seen as a way of reviving the fortunes of both banks.

If we bring ourselves forward in time to this morning then the story has moved on.

Net revenue at its sprawling global investment bank, which accounts for more than half the German bank’s overall revenue and which relies heavily on its bond trading earnings, fell 13 percent to 3.3 billion euros (£2.8 billion).

The German flagship lender posted a net profit of 201 million euros, up 68 percent from a year ago but hardly making up for a net loss of 409 million euros in the fourth quarter as the bank battles stiff competition from U.S. powerhouses. (Reuters).

The share price has responded with a nearly 3% fall to 7.27 Euros. This continues the trend of the last year where it has lost 38% and beyond that because if my chart is any guide the pre credit crunch peak was over 94 Euros. The response on social media to me pointing out these matters has varied from that is 7.27 Euros too high to this from Nicholas Dubois.

Because in my eyes, the market is emotionally driven at the moment in DB, not seeing through the fundamentals – why was the stock up more than 5% yesterday and 10% higher from here ? Noise. CET1@13.7%, VaR only 27m (!) – chance of a lifetime.

How many chances of a lifetime have we had now to invest in banks? As a punt at a low price this can work as for example the Greek banks have shown recently but as a long-term investment you only get poorer.

RBS

Again the news started yesterday. From Sky News.

Royal Bank of Scotland (RBS) boss Ross McEwan has quit, saying the time is right to leave as it is in a “much stronger financial position”.

The news was announced ahead of the bank’s annual general meeting in Edinburgh – five-and-a half years after he took over the reins of the part-nationalised lender. ( Sky News)

Somewhat irreverently I suggested that he was clearing the decks so he could apply to be Governor of the Bank of England. Although this from Simon Jack highlights that the reality is of a rather odd sort of resignation.

He is staying till 2020. 12 month notice period

That is rather different to my days in the City of London where if they could not persuade you to change your mind you got sent home with your belongings in a black bin liner.

As to his tenure there are clear issues because RBS is still mostly owned by the taxpayer and whilst it does now have profits here is its own statement from earlier.

RBS reported an operating profit before tax of £1,013 million, compared with £1,213 million in Q1 2018 primarily reflecting £265 million lower income, partially offset by £73 million lower operating expenses.  Q1 2019 attributable profit of £707 million compared with £808 million in Q1 2018.

Up is the new down again, or something like that. We get a deeper perspective from the share price which has fallen 11 pence today as I type this to 239 pence. UK taxpayers of a nervous disposition might like to sit down before reading the next bit.

 still way below the 502p the Labour government paid for them at the height of the crisis. ( Sky News)

Here is the Daily Telegraph from those days back in 2008 and the Chancellor was Alistair Darling.

The Chancellor said the taxpayer would not lose out.

“The taxpayers’ interest is being protected,” he said.

“I’m very clear that in return for all this, the taxpayer has got to see some upside. In relation to lending to small businesses, in relation to mortgages… that’s important too.”

 

Comment

The official story about the banks has sung along with Carly Simon.

I know nothing stays the same
But if you’re willing to play the game
It’s coming around again

They are always about to turn the corner on what turns out to be a Roman road. Also I note the mention of small business lending from a decade ago which has also been a grim theme. Those who have followed my updates on that issue will now that the promises here have required this to believe them.

Are you drunk enough?
Not to judge what I’m doin’ ( Calvin Harris and Sam Smith)

The subject reconvened in the summer of 2012 when the Bank of England claimed it was supporting the area but in fact reverted to type and pumped up mortgage lending by giving the banks yet another subsidy. Meanwhile lending to small and medium-sized businesses has required the use of the establishment’s ultimate admission of failure the use of the word “counterfactual”

I fear that Deutsche Bank is even worse because it has pretty much carried on regardless with the stories about past losses on derivatives never going away. Or to put it another way if big investors really believed they are just an illusion or imagination the share price would be nowhere near here. Now we face another slow down with the banks still singing along with Lyndsey Buckingham.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

It all comes down to the fact that the socialisation of losses helped to stop a change in behaviour as for so many the party mostly just carried on. The scandals of what it did to smaller businesses and the 2008 rights issue show that the law of the land often turns its blind eye to the banks as well.

 

 

 

 

9 thoughts on “Deutsche Bank and RBS continue to headline the zombie bank era

  1. I think there is an interesting lesson to be learned from this and the way our monetary system works. Whatever other burdens we taxpayers bear it’s not RBS. Tax money did not bail them out the public purse did with newly minted keystrokes. It cost nothing produce so anything the exchequer gets back is a ‘profit’. Only all money paid to this said institution is automatically destroyed that is the purpose of tax and repayment of debt.

    The sovereign money creator can indeed sing along with Imagination.
    it’s just an illusion
    (Putting me back) in all this confusion
    (Could it be that) it’s just an illusion (now).

    • Hi bill40

      That is an interesting perspective in terms of treating the money put into RBS as a cash flow issue rather than profit or in this case loss. The danger with that sort of thing is that when you cross the central bank to Treasury barrier as that would do then you are into monetary financing. We have few examples of it but when I looked at Ghana doing it a few years back the Cedi did tank.

      At current Gilt yields there is not an enormous difference though although when all this took place they were a lot higher.

  2. DB’s investment bank is interesting because in practical terms it isn’t a German bank at all but a London one. Most of what it does is driven by London. Not sure if it was like that in your day Shaun. Also given that an awful lot of German manufacturing businesses are privately owned it is hard to tell just how much lending they are doing to the “real” German economy.

    It’s my opinion based on contract rates and salaries that I have seen from people applying for work who have been at Deutsche that are very generous with renumeration and I am not convinced they get good value for money. The attitude seems to be that if you pay the most you get the best but you often just get people driven by earning the most who are not necessarily that good.

    I take no pleasure from the problems they are having as it is not helping anyone having a business that should be enabling other businesses and clients finding itself struggling because it bet far too much on derivatives that no-one is really sure if it is genuinely solvent.

    • Hi bootsy

      The DB investment bank in London had 2 areas which did very well ( warrants & futures spreads), of which I dealt with the latter much more than the former. So say 50 out of 300 or so. Let’s say that there are some markets you would want to be in for other reasons. So I would have employed 100 or so rather than 300.

      I wish the other 200 no ill but in my opinion they were there for reasons of empire building rather than a proper business mindset.

  3. I know that it’s like a broken record, Shaun, but investment banking and lending have absolutely nothing in common. Fees, trading income, the staple of investment banks, has nothing to do with lending decisions to real businesses. The staff, salary scales, bonus expectations are also totally different.
    The reality is that investment bankers use the huge clearing bank balance sheets to punt on everything that moves, from commodities to derivatives.
    The investment bankers (and I was a director of Kleinwort Benson a long time ago- Nea culpa) have run rings round the clearing bank boards, regulators and governments.
    So we now have a system where the vampire squid etc advise ministers and both wring their hands in public about the lack of lending etc but actually couldn’t care less because their bonuses carry on and they find the politicians.
    Until we split lending from the crazy bonus culture of investment banks, this will simply go on and on.
    If you survey the European banking system, the key banks (Dresdner, Deutsche, Barclays etc etc have been brought low by adventures into things that they had no understanding of.
    So, RBS and Deutsche are zombie banks but not because they lent badly but because they had CEOs who completely missed the point of banking, swallowed whole the investment banking nonsense and had supine boards.
    Rant over.

    • Hi James

      I can reply with a specific example from my time which was the purchase of O’Connors an option trading partnership by Swiss Bank. What they were really buying was the management who went on to run Swiss Bank. The catch is that it was on the investment banking model but with clearing bank backing so rather than 500 lots being bought there was the temptation to buy 5000.

      “Temptation
      (Keep climbing higher and higher)
      Temptation
      (Adorable creatures)
      Temptation
      (With unacceptable features)
      Temptation
      (Trouble is coming)
      Temptation
      (It’s just the high cost of loving)
      Temptation
      (You can take it or leave it)
      Temptation
      (But you’d better believe it)
      You’ve got to make me an offer
      That cannot be ignored”

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