Deutsche Bank: In a rut
Posted by hkarner - 16. Juli 2016
Source: The Economist
Brexit is merely one more worry for Germany’s leading lender
THE biggest bank in Europe’s most robust economy may seem an unlikely victim of Brexit. Yet in the fortnight after Britons voted to quit the European Union Deutsche Bank’s share price tumbled by 27%—putting Germany’s biggest lender in the unexalted company of British and Italian banks. On July 7th it slid to €11.36 ($12.58), a record low.
The price has since clambered back towards €13. But Deutsche still trades at only a quarter of the supposed net value of its assets—far behind its peers (see chart). Its shares fetch half of what they did a year ago and an eighth of what they did in 2007. It lost a staggering €6.8 billion in 2015. The newish chief executive, John Cryan, is carrying out an overdue spring-clean: he has told investors to expect no profit or dividend this year (and scrapped last year’s too). Brexit makes the job a little harder.
Mr Cryan is overhauling Deutsche’s rickety computer systems, closing offices and shedding 9,000 jobs. But his most pressing task is to thicken Deutsche’s capital cushion. The bank is not in mortal danger, but in these post-buccaneering days regulators insist that lenders have ample means to withstand big losses. European “stress tests” this month may not flatter Deutsche, partly because they take no account of its capital-boosting plans.
Deutsche’s ratio of equity to risk-weighted assets, an important gauge of resilience, is 10.7%. Had the latest regulations been in place in 2009, estimates Autonomous, a research firm, Deutsche’s ratio would have been a threadbare 2.4%, and just 5.5% even in mid-2012. Despite this improvement, Deutsche still lags its peers. Mr Cryan wants to lift its score to 12.5% by 2018.
The sale of a stake in Hua Xia, a Chinese bank, due to be completed soon, should close around 0.5 points of that 1.8-point gap. The disposal of Postbank, a German mass-market retail bank of which Deutsche took control in 2010, is slated to bring in most of the rest. (Deutsche also has another, posher retail operation under its own name.) But Mr Cryan has soft-pedalled on the sale. Postbank relies chiefly on deposit-taking and mortgage lending, and the euro zone’s ultra-low interest rates have made it less attractive to would-be buyers. Hurrying to sell makes little sense.
The Brexit vote portends weaker growth in Europe and thus even lower rates, making Postbank even less alluring. Still-lower rates also make it harder for Deutsche to fatten capital by making and retaining profits. Its net interest income (the difference between what it pays depositors and charges borrowers) dropped by 7%, year on year, in the first quarter.
Slower growth in Europe is also little use to Deutsche’s investment bank, which suffered with the rest of the industry in the market turmoil at the start of the year. The second quarter may have been better—and Brexcitement boosted trading volumes. But the second half may be weaker again. And in recent years Deutsche has been hampered by its focus on fixed income—selling, trading and underwriting bonds—in which it is among the world’s leaders. According to Huw van Steenis of Morgan Stanley, industry revenues from bonds, currencies and commodities fell by 9% a year in 2012-15, while equities businesses grew by 6% annually. Among big banks, none relies on fixed income more than Deutsche does.
The bank has legal worries too. The biggest of these is an allegation by America’s Department of Justice that Deutsche misrepresented the value of residential mortgage-backed securities before the crisis of 2008. Other leading banks have already settled similar claims. American and British authorities are also examining whether slack controls at Deutsche let money-launderers spirit cash out of Russia. Deutsche has set aside €5.4 billion to cover legal bills. Another looming headache is a proposal by international regulators that would sharply increase capital requirements for mortgages and other loans.
Mr Cryan said this month that he didn’t see his bank as a takeover target. He’s right about that: regulators think banks are big enough. He also said that Deutsche would reach its capital target without needing to tap up investors. He may be right about that, too—but it’s much less certain.