Deutsche bank stock crash -
Dramatic Deutsche Bank share price drop to lowest level since 1980’s sparks fears it could collapse and trigger global financial panic
SHARES in Germany’s biggest bank crashed to their lowest level since the 1980s yesterday - amid fears it could collapse and trigger global financial panic.
The plight of Deutsche Bank, run by Brit John Cryan, has the potential to devastate not only Germany’s financial system, but could hurt the UK’s as well.
Its share price fell below €10 early yesterday.
British banking stocks also slumped in early trading with Barclays and Lloyds both falling around 2.5 per cent, and RBS dropping 1.6 per cent by late morning.
It came amid concerns Deutsche could become the next Lehman Brothers, the US bank, whose collapse effectively heralded the start of the 2008 financial crash.
Deutsche’s decline has come over time.
Its share were worth close to €100 before the crash.
But last October it announced 9,000 jobs cuts and in January this year, it reported its first annual loss since the credit crunch.
The trigger for its most recent woes was a $14billion (£10.8billion) fine, the Department for Justice in the US hit it with last month.
The penalty was related to toxic-mortgage backed bonds it issued in the build-up to the last financial crash.
Mr Cryan, its Yorkshire-born chief exec, moved to calm fears yesterday, telling staff its finances are strong.
He wrote in an email: “We should consider this in the context of the bigger picture: Deutsche Bank overall has more than 20 million clients.
“I understand if you feel concerned by the extensive coverage on this issue. Our bank has become subject to speculation. Ongoing rumours are causing significant swings in our stock price.
“It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust.”
But with German chancellor Angela Merkel said to be against a bail-out by her government - its crisis is growing.
Collapse Of Deutsche Bank Would Be Catastrophic For Global Financial System – Here’s Why (+24K Views)
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…The global financial system simply cannot afford for Deutsche Bank to fail, and right now it is literally melting down right in front of our eyes…[Indeed,] many now believe that the end is near for Deutsche Bank. Here’s why.
…On July 7 the beleaguered German giant announced that it is laying off 18,000 employees—roughly one-fifth of its global workforce—and pursuing a vast restructuring plan that most notably includes shutting down its global equities trading business…These moves may delay Deutsche Bank’s inexorable march into oblivion, but not by much and, as Deutsche Bank collapses, it could take a whole lot of others down with it at the same [email protected] Finances
- According to Wall Street On Parade, the bank had 49 trillion dollars in exposure to derivatives as of the end of last year…putting it in the same league as the… U.S. juggernauts JPMorgan Chase, Citigroup and Goldman Sachs, which logged in at $48 trillion, $47 trillion and $42 trillion, respectively.
- The actual credit risk to Deutsche Bank is much, much lower than the notional value of its derivatives contracts, but we are still talking about an obscene amount of exposure and this is especially true when we consider the state of Deutsche Bank’s balance sheet.
- According to Nasdaq.com, as of the end of last year, the bank had total assets of $1.541T and total liabilities of $1.469T. That’s not much in the way of equity…and things have deteriorated rapidly since that time. In fact, it is being reported that $1T a day is being pulled out of the bank at this point.
…The global derivatives market played a starring role during the last financial crisis, and it will play a starring role in the next one too…
- The…failure of Deutsche Bank could quickly become a major crisis for the entire global financial system…as some of the largest “too big to fail banks” in the United States, such as JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America, as well as other mega banks in Europe, are “heavily interconnected financially” to Deutsche Bank.
- In fact, the IMF concluded that Deutsche Bank posed a greater threat to global financial stability than any other bank as a result of these interconnections (and that was when its market capitalization was tens of billions of dollars larger than it is today).
It appears that the next “Lehman Brothers moment” may be playing out right in front of our eyes. Now more than ever, keep a close eye on Deutsche Bank, because it appears that they could be the first really big domino to fall.
Editor’s Note: The above excerpts from the original article by Michael Snyder have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
1.Derivatives Are Nothing More Than A “Game” of Russian Roulette! Here’s Why
Russian Roulette: Put one bullet in the cylinder of a revolver, spin the cylinder, point the gun at YOUR head, and pull the trigger. Most revolvers have 6 chambers, so your odds of surviving are 5 in 6, IF you quit after pulling the trigger once. Press your luck, spin the cylinder, point the gun, and pull the trigger again. It might be okay. Try for a third time? Now let’s play Russian roulette – derivatives style.
2. Derivatives: Their Origin, Evolvement and Eventual Corruption – Got Gold! (+3K Views)
The term “derivative” has become a dirty, if not evil word. So much of what ails our global financial system has been laid-at-the-feet of this misunderstood, mischaracterized term – derivatives. The purpose of this paper is to outline the origin, growth and ultimately the corruption of the derivatives market – and explain how something originally designed to provide economic utility has morphed into a tool of abusive, manipulative economic tyranny.
3.Financial Armageddon Approaches: 6 Major U.S. Banks Are Betting 24 TIMES MORE MONEY THAN THEY HAVE Via Derivatives
Deutsche Bank’s catastrophic derivative exposure has hammered down its stock price from $135 in 2007 to only $17/share today – ergo a heart-stopping price loss of -87%. Furthermore, DB’s stock price appears to be hell bent for leather to follow Lehman Brothers’ lethal path to Wall Street’s graveyard due primarily to its oppressive derivative’s exposure. As Warren Buffett has said: “Derivatives are weapons of mass destruction.”
4.Bursting of Global Derivatives Bubble Will Be An Utter Nightmare (2K Views)
Never before in the history of the United States have we been faced with the threat of such a great financial catastrophe but, sadly, most Americans are totally oblivious to all of this. They continue to have faith that their leaders know what they are doing, and they have been lulled into complacency by the bubble of false stability that we have been enjoying for the last couple of years. Unfortunately for them, however, this bubble of false stability is not going to last much longer and when the financial crisis comes it is going to make 2008 look like a Sunday picnic. Let me explain why I believe the aforementioned to be the case.
5.Coming Derivatives Crisis Will Cause Panic in Financial Markets With Horrific Consequences – Here’s Why (+2K Views)
Wall Street has been transformed into a gigantic casino where people are betting on just about anything that you can imagine. This works fine as long as there are not any wild swings in the economy and risk is managed with strict discipline but, as we have seen, there have been times when derivatives have caused massive problems in recent years – the government bailout because of derivatives at AIG; the failure of MF Global because of bad derivatives trades; and the 6 billion dollar loss that JPMorgan Chase recently suffered because of derivatives – [but the next] derivatives panic that comes will destroy global financial markets, and the economic fallout from the financial crash that will happen as a result will be absolutely horrific. [Let me explain my contention.]
6.Will Rising Interest Rates Ignite the Derivatives Time Bomb?
Of the $200+ trillion in derivatives on US banks’ balance sheets, 85% are based on interest rates and for that reason I cannot take any of the Fed’s mumblings about raising interest rates seriously at all. Remember, most if not all, of the bailout money has gone to US banks in order to help them raise capital. So why would the Fed make a move that could potentially destroy these firms’ equity and essentially undoing all of its previous efforts? That being said I still see derivatives as a trillion dollar ticking time bomb with a short fuse.
Deutsche Bank to Initiate the Next Financial Crisis? Stock Could Be Headed to Zero
Remember Lehman Brothers and the chaos that it created when it failed? If you think that the Worlds' Central Banks are now wiser and consequently will not allow another similar event to occur, think again. We will not only see a repeat of this occurrence, but it could be exponentially larger than Lehman's was. Allow me to explain.
On June 29, the IMF stated that "among the [globally systemically important banks], Deutsche Bank (DB) - Get Deutsche Bank AG Report appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse," reports The Wall Street Journal.
Even if true, why should you be concerned about a German bank and how it will affect you while living in the U.S.? The IMF adds: "In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country," reports Bloomberg. This Wall Street Journal chart shows that Deutsche is inextricably connected to many important banks around the world, including all of the most important banks in the U.S.
Now the bad news: For two years in a row, the American unit of Deutsche Bank has failed the Fed's stress test, which determines the ability of the bank to weather another financial crisis.
Leverage of Lehman vs. Deutsche Bank
In 2007, Lehman had a leverage (the ratio of total assets to shareholder's equity) of 31-to-1. At the time that Lehman filed for bankruptcy, it had $639 billion in assets and $619 billion in debt. Still, it caused a systemic risk worldwide.
In comparison, Deutsche Bank has a mind-boggling leverage of 40-times, according to Berenberg analyst, James Chappell. He stated, "facing an illiquid credit market limiting Deutsche Bank's ability to deliver and with core profitability impaired, it is hard to see how [Deutsche Bank] can escape this vicious circle without raising more capital. The CEO has eschewed this route for now, in the hope that self-help can break this loop, but with risk being re-priced again it is hard to see [Deutsche Bank] succeeding."
Why Can't the European Central Bank save Deutsche Bank?
The nominal value of derivatives risk that Deutsche Bank holds on its books is $72.8 trillion, according to the banks' April 2016 earnings report. What is astounding about this, is that a single bank owns 13% of the total outstanding global derivatives, which was a staggering $550 trillion in 2015.
What is more alarming is that the market cap of Deutsche Bank is less than $20 billion.
Nonetheless, the nominal value of derivatives exposure does not mean that Deutsche Bank will have a default worth trillions of dollars, seeing as most of the contracts are covered by counterparties. However, when the domino effect is put into motion, we have already witnessed how it can engulf the entire world.
If the domino effect does occur, Germany with its GDP of $4 trillion or the EU with a GDP of $18 trillion will not be in a position to gain control over it.
Why Negative Interest Not the Solution
The European Central Banks' NIRP (Negative Interest Rate Policy) is making matters worse for Deutsche Bank, as the banks' profits are getting squeezed, thus making it difficult for it to repair its' balance sheet. Higher interest rates usually give banks more room to book profits on lending.
The bank is finding it difficult to sell its assets because of illiquid credit markets. The banks' management will also find it difficult to raise capital as the investment-banking industry is in a "structural decline," according to Berenbergs' Chappell.
Brexit Is Adding to the Woes
Deutsche Bank receives 19% of its revenues from the U.K. After the Brexit vote, the uncertainty regarding future relations of the U.K. with Europe has increased the risk for all of the banks. President Francois Hollande of France is eyeing the financial industry and is pitching for them to move to Paris from London.
Deutsche Bank is the biggest European bank in London. Moving operations, which are handled by 8,000 members of the staff, will not be an easy task for Deutsche Bank and will further weaken its balance sheet.
How Is the Stock Behaving?
The stock is in a downtrend and has broken below the panic lows of 2009.
The stock is quoting at a price to book ratio of 0.251, which indicates the pessimism of the markets towards the stock. The investors believe that the stock is not worth more than a quarter of its liquidation value.
A comparative study of the stock with Lehman gives a more accurate picture of the future price of Deutsche Bank, which is zero.
The German Newspaper Die Welt reported that the great George Soros had recently opened a short position of 0.51% of Deutsche Bank's outstanding shares. This equates to seven million shares, worth $7.5 billion, reports Investopedia.
So, What Should You Do?
The easy monetary policy of various central banks is the main reason for banks holding such massive leverage. The next financial crisis will cause the central banks' actions to be redundant and ineffective, as they may not be in a position to control this impending catastrophe. In such a situation, the world will revert to the only remaining resort left, and that is is gold.
My readers have benefited immensely during the mini-crash post-Brexit. Please continue to follow me so as you can protect yourself from the next big one, which will wipe out tens of trillions of dollars around the world.
This article is commentary by an independent contributor. Chris Vermeulen is full-time trader and research analyst for TheGoldAndOilGuy Newsletter. Author does not have any position in DB shares at this time.
Deutsche Bank shows it learned nothing from the 2008 crisis
Deutsche Bank’s recently announced restructuring meant to correct its decadelong financial woes could ultimately make matters worse.
Indeed, it could become even more of a threat to taxpayers, the financial system and the global economy.
The megabank’s transformation plan includes closing its global equities sales and trading operations; cutting back investment banking; segregating some of its riskiest, most toxic assets into a separate division for eventual sale; and eliminating about 18,000 jobs.
Deutsche Bank CEO Christian Sewing recently stated that the comprehensive restructuring is aimed at improving profitability and “returning to our roots” among “the leading banks in the world.
However, the details of the plan suggest that Deutsche Bank has learned the wrong lesson from 10 years of poor management and regulatory forbearance: A too-big-to-fail bank almost always has options to reward its shareholders and senior management at the expense of its own financial condition, the taxpayers and the public interest.
Given that the restructuring is an uncertain, high-risk, multiyear plan, the responsible course of action for Deutsche Bank would be to plan conservatively and conserve capital cushions until the targeted profitability actually materializes.
Yet Deutsche Bank is doing the opposite.
Sewing has reportedly said that he hopes to free up capital near-term that can be returned to shareholders. That is undoubtedly meant to rebuild confidence with shareholders whose stock price in the company has dropped 75% in the past four years. The plan freezes dividends for two years. But remarkably, the bank reportedly has regulatory approval to lower its common equity in the meantime by 1% to 12.5%, which is simply too low for a bank in such a fragile condition.
Reducing capital to increase short-term returns for shareholders is grossly irresponsible.
Deutsche Bank is essentially diverting its critical loss-absorbing capital buffer — that would otherwise be available as a source of strength to weather an economic downturn — to placate its angry shareholders. That plan jeopardizes the financial resiliency of the global bank and can pose systemic risk to the financial system.
Moreover, the disgruntled shareholders are the same ones who’ve repeatedly failed to hold Deutsche Bank’s senior executives accountable for the poor management decisions, leading to the bank’s current financial duress. Permitting senior management to prioritize short-term shareholder returns by offloading risks onto the global financial system is foolhardy.
Adding insult to injury, Deutsche Bank’s management is announcing its intentions at the worst possible time. The bank has reportedly been paying some of the highest rates in bonds due to concerns about its financial condition.
Recent credit ratings downgrades have cited a heightened risk of financial distress in the event that the bank’s planned restructuring and changes to its risk profile do not manifest the expected benefits. However, Deutsche Bank’s new reduced capital position will put it metaphorically within inches of breaching regulatory capital requirements.
Deutsche Bank’s profitability also appears to be especially sensitive to interest rate movements, which is a vulnerable position to be in given the recent rate cut from the Federal Reserve and other central banks. For example, Goldman Sachs reportedly has estimated that a rate cut of a fraction of a percentage point would eat away as much as 42% of Deutsche Bank’s 2019 estimated earnings.
Moreover, Deutsche Bank’s well-known intent to sell troubled assets weakens its negotiating position in the markets. It is likely to sell troubled or nonperforming assets at significant discounts, realizing equally significant losses over time.
In addition, Wall Street’s awareness that Deutsche Bank may be seeking to unwind a massive derivatives portfolio in its “bad bank” unit will increase those losses. Deutsche Bank has reportedly already set aside more than $1.6 billion to cover expected losses on that portfolio, which reflects a discount to compensate the few purchasers in the market for a portfolio of that size for the risks and high capital requirements associated with those derivatives.
Other illiquid, hard-to-price assets are likely to form a substantial part of the bad bank’s assets and positions. Those assets are not just hard to sell. They are hard to model, which means easy to manipulate for capital purposes. The ultimate market values may differ significantly.
In all of these circumstances, Deutsche Bank’s capital should be going up, not down. After all, no one made Deutsche Bank hold the portfolio of securities, derivatives and loans that require its current level of capital. Deutsche Bank’s mismanagement has created its own current perilous condition and resulting capital challenges, not the capital regulations.
Deutsche Bank’s senior executives and major shareholders stand to reduce their exposure and make substantial sums of money, if the restructuring plan works. If it doesn’t or the economy weakens, the global financial system and U.S. taxpayers will be forced to accept unnecessary risks and costs, again.
Should the worst happen, taxpayers undoubtedly would be asked to fund cleverly constructed guarantees, pledges, facilities or asset-purchase programs in order to prop up Deutsche Bank. It is too big to fail.
And Deutsche Bank’s latest plan proves, yet again, that privatizing gains and socializing losses at too-big-to-fail global banks is alive and well.
Most people lost money when the subprime market collapsed in late 2006, taking the economy down with it. But Wall Street Journal reporter Greg Zuckerman’s new book, The Greatest Trade Ever, tells the story of the handful of hedge-funders who actually made money from the ensuing crisis by betting against a housing bubble that few, at the time, believed was real. It’s a great read, not just because our semi-irregular column If We Were Friends With John Paulson is briefly mentioned, but because of the colorful cast of characters, all of whom might have been described as screwups before they executed the trade that scored them billions of dollars in profits. Reading the stories of how this ragtag bunch managed this feat, individually and, in some cases, together, you can’t help but root for them, even as you remind yourself that their win was everyone else’s loss. Let’s take a look at the backstories of some of the eccentrics, nerds, and late bloomers who made bank as the economyburned.
LOCATION: New York
BACKSTORY: Back in 2006, Paulson & Company was “just another ham-and-cheese operation in a crowded space,” and its founder was known mostly for the parties he had held back in the nineties at his Soho loft, which featured “good food, plentiful drink; and access to an assortment of recreational drugs for those who chose to partake.” Even after Paulson grew out of his bachelor phase, he wasn’t taken seriously in his field — and, as the following passage suggests, he knewit.
At times, Paulson didn’t seem completely put together. When Brad Balter, a young broker, came to visit, Paulson chain-smoked cigarettes and had spots of blood on his shirt collar from a shaving mishap. Paulson’s head of marketing was stretched out in agony on a nearby couch, moaning about hisback.
“I didn’t know what to think. It was a little surreal,” Balterrecalls.
At times, Paulson became discouraged. His early investment performance was good but uneven, and he continued to have few clients. He was sure of his abilities but questioned whether he could make the fund asuccess.
HAPPYENDING Paulson’s firm, which was the most successful of the ones who shorted subprime, made $15 billion in 2007, earning the founder a personal payday of $4 billion, the respect of his peers, and now, a prominent place in this book (although his spokesman tells us he is not pleased with Zuckerman’s work, finding “the writing style… indicative of a gossip tabloid rather than respected financial journalism”).
LOCATION: Santa Monica, California
BACKSTORY: With his “chilled-out surfer” attitude and “chiseled features,” Andrew Lahde was successful as a high-school pot dealer — and with the ladies. But his issues with authority kept him from professional success. By the summer of 2006, he’d been fired from his hedge-fund job, and though he’d started his own fund, Lahde Capital Management, with the idea of buying insurance on the risky mortgage bonds he was sure would soon be “toast,” he was having trouble convincing investors to buy into his apocalyptic vision. “Andrew’s not a perfect guy to persuade you to invest,” a friend who is the founder of Perfect 10, a porn magazine, tells the author. “He’s a youngster and he’s a little strange … nervous aroundpeople.”
When the ABX index suddenly snapped back in the spring and Lahde suffered losses, it seemed like a death knell for his ambitious plan. He ignored calls from friends and family, desperate to find investors to back him. His savings were almost depleted. Dispirited, Lahde spent much of the day at the nearby beach, suntanning and ogling bikini-clad women. Fuck it, I’m just going to hang out at the beach, he thought. The way Lahde figured it, he hadn’t made much money. And yet, the ABX had dropped 10 percent since he started pitching his trade, making protection more expensive than it had been when he dreamed up the trade and tried to capture the interest of investors. If they didn’t care about his trade then, they surely wouldn’t care now that it was more expensive. He seemed out of luck.
HAPPYENDING: Lahde eventually convinced an investor to give him $6 million with which to purchase CDS, and his fund netted $75 million on the trade, $10 million of which he pocketed personally. Afterward, Lahde fired off an amazing F.U. letter to the world at large and has since retreated to “a distant island,” where he “snorkels most days while searching for a suitable young female partner to join him on his adventure.”
LOCATION: New York
BACKSTORY: When John Paulson hired Paolo Pelligrini, he was essentially unemployable. He’d been fired by two investment banks, and had just endured his rather harrowing second divorce. “I was forty-five and had zero net worth,” Pelligrini says. “And from my perspective, I had no prospects.” He lived alone, like a Mediterranean Jay Gatsby:
He had no television in his small one-bedroom rental. He chose to live close to a train station and his favorite golf course. For entertainment, Pelligrini began to catch up on classic American writers, such as Edith Wharton and Henry James, authors he never had a chance to enjoy in school. Pelligrini found a connection with their stories of outsiders struggling to break into high society; including New York’s upper crust scene, something he had failed todo.
HAPPYENDING: Pellegrini’s late-night research convinced his employer of the existence of the housing bubble, which the firm proceeded to short. He made tens of millions of dollars for himself on the trade, which allowed him to buy some “entry-level supercars,” as well as a much better apartment.
LOCATION: San Jose, California
BACKSTORY: “I always was a bit of an outsider,” says Michael Burry. That’s putting it mildly. Burry, a trained doctor, has a glass eyeball, a penchant for heavy metal, and Asperger’s syndrome, which helped feed his obsession with the stock market. At first, it didn’t go that well (“I’m single and I have one eye and a lot of debt” was the personal ad he placed to meet his wife). But by 2006, his Scion Capital was managing $621 million, and Burry was convinced he was about to make the trade of his life. Unfortunately, his investors disagreed, and fought back when he started buying what they saw as useless credit default swaps. Things gotrough:
HAPPYENDING: Eventually, pressure from his investors forced him to sell some of the CDS insurance he had purchased, but Burry still managed to generate gains of 166 percent in 2007.
LOCATION: New York
BACKSTORY: With his brown pinstriped suits, pretentious hobbies (like his sushi spreadsheet), and “unusually long and thick” sideburns, Greg Lippmann, a mortgage bond trader at Deutsche Bank, “never quite fit in on Wall Street.” When he started selling credit default swaps, he became an actual object of derision.
HAPPYENDING: Lippman had the last laugh: When the ABX subprime index, which tracks the demand for credit default swaps, tanked in February of 2007, he and his crew raked in $100 million in a single week.
LOCATION: Los Angeles, California
BACKSTORY: In the late eighties, Jeff Greene had built his high-school job making sales calls for the circus into an empire: He had millions of dollars of real estate in Los Angeles, a Mercedes, a mansion, and a side business managing family-oriented music groups. Then the housing market collapsed, and he nearly losteverything.
HAPPYENDING When his old friend John Paulson told him the next housing bubble was on the horizon in hopes of getting him to invest in his fund, Greene wanted to act. But instead of investing in Paulson’s fund, he replicated the trade himself. He lost a friend in Paulson, but gained $500 million, and a reputation as an investing genius. “Now, when I say things off the cuff, people listen,” he said. “It’s scary.” Yes it is, Jeff.
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The next financial crisis is probably around the corner—we just don’t know from where
Financial crises are happening more frequently, becoming almost a fixture of modern life, according to research by Deutsche Bank. While meltdowns remain difficult to see in advance, the next panic is almost certainly brewing, and it may well be provoked by the world’s major central banks.
The German bank’s study of developed markets uses this criteria to define a financial crisis: on a year-over-year basis, a 15% drop in stock markets, 10% decline in foreign-exchange, 10% fall in bonds, 10% increase in inflation, or a sovereign default.
Deutsche Bank argues that crises have been increasingly frequent since the breakdown of the Bretton Woods system, which, after World War II, fixed exchange-rates and essentially linked them to the price of gold. That coordination ended in the 1970s when the US broke the dollar’s peg to the yellow metal. The link to a finite commodity helped limit the amount of debt that could be created.
As strategists at the Frankfurt-based lender see it, the resulting fiat money system has encouraged rising budget deficits, higher debts, global imbalances, and more unstable markets. At the same time, banking regulations have been loosened. In the US, the industry may soon have fewer restrictions and less oversight, a mere 10 years since the last worldwide crisis.
Post-Bretton Woods, policy makers have the flexibility to create as much money as needed to sooth a financial meltdown. However, this can also provide the foundation for the next one, according to Deutsche Bank. A subsequent, potentially bigger, crisis is more likely because the problem has just been passed along to another part of the financial system. The Federal Reserve, Bank of Japan, and European Central Bank now hold more than $13 trillion of assets on their balance sheets, up from less than $4 trillion in 2007, according to Yardeni Research.
The modern framework can allow credit stockpiles to climb: Global government debt is approaching 70% of gross domestic product, the highest since World War II and up from less than 20% in the 1970s, according to Deutsche Bank. The US has run an annual budget deficit for 53 of the past 60 years.
“We think this leaves the current global economy particularly prone to a cycle of booms, busts, heavy intervention, recovery and the cycle starting again,” Deutsche Bank said. “There is no natural point where a purge of the excesses is forced by a restriction on credit creation.”
Where will the next crisis come from? Deutsche Bank says there are plenty of things to worry about. Italy has a massive debt burden, a brittle banking system, and a dysfunctional government. China may have a property bubble on its hands and has long been fueling its growth with debt. Populist political parties could disrupt the world order as we’ve known it.
But one of the most obvious problems is how to unwind central bank balance sheets of unprecedented size, during a time of record-high peacetime government debt, while bond yields are at multi-century low interest-rates. The bank’s strategists say they’re “quite confident” there will soon be another financial shock, a pattern that will be repeated until the world figures out a more stable financial framework.
What Deutsche Bank’s recovery looks like from the inside
Every week, Deutsche Bank’s Mark Fedorcik studies what might be one of the most critical metrics for the operating division that he leads, the investment bank. Because if the pandemic has proved anything to people in jobs like his, it is that few things are more important than the one-on-one dialogue between a banker and their client.
“I look at the number of calls our managing directors and directors make to clients each week,” he tells Euromoney. “They log them and we track them, and in the first quarter of 2021 we were up 50% year on year.”
That certainly sounds good, but are those bankers having better conversations? Fedorcik admits that there is no perfect science behind measuring that, although one assumes banks will in time deploy artificial intelligence tools to answer that question too. For the moment, however, Fedorcik says the proof will come out in revenues.
On that score, things are certainly looking bright at the German lender. In the last four quarters the bank’s origination and advisory revenues are up 24% compared with the previous period. Fixed income and currency sales and trading revenues are up 19%.
At €9.8 billion, the investment bank’s overall revenues have been on a tear. In dollar terms, it’s a rise of 27%. It might come as a surprise that this is a bigger jump than at any other global investment banking rival, after stripping out the equities business in which Deutsche Bank no longer participates.
Even in reporting currency terms, Deutsche’s 19% increase is creditable alongside 20% at Goldman Sachs and 22% at Morgan Stanley. It’s from a low base perhaps – Goldman’s business is twice the size, JPMorgan’s nearly three times – but you work with what you have. And Deutsche seems to have been doing that pretty effectively of late.
The performance seems to be a vindication of the Project Cairo transformation of Deutsche Bank announced by chief executive Christian Sewing in July 2019, in which he pledged to reduce or exit areas where the bank could not profitably compete, such as equities trading, and focus on where it could, such as serving its core corporate client base more deeply.
The bank’s rivals sound less sceptical than they did two years ago, even if they maintain that a strategic transformation born of necessity – as Deutsche Bank’s was – is often difficult to make work well.
“It’s hard to shrink to greatness,” says a senior executive at one of the world’s most revered banking franchises. “Deutsche Bank managed to convince itself to get out of equities just as a big equity boom was happening, but they are probably doing what I would have done in their position.
“You have to pick between a bunch of tricky options when you are getting smaller in a consolidating world.”
It’s hard to shrink to greatness. You have to pick between a bunch of tricky options when you are getting smaller in a consolidating world
Senior banking executive
Internally at Deutsche Bank there seems to be no shortage of confidence that the track is the right one. When reporting first half earnings, Sewing said that the previous 2022 target of €8.5 billion of investment bank revenues now looked conservative, given that it would likely surpass €9 billion in 2021. In 2020 it posted €9.3 billion, although the €7 billion seen in the pre-pandemic year of 2019 may be the more meaningful comparison.
European investment bankers say that the pandemic proved that there is a place for big, local investment banking champions like Deutsche Bank and BNP Paribas. Bankers at US firms reluctantly agree that European clients seem to value having that option.
Investors, for the moment, seem to be buying into the story. The bank’s shares are trading more than 50% above where they were when Sewing announced his new strategy on July 7, 2019. Barclays stock is only up 14% over that period; JPMorgan is up 37%.
Much of the bank’s improved return profile is down to the investment bank, where return on tangible equity for the first half of 2021 was 15.5%, up from 10.1% for the same period in 2020 and just 1.1% for the full year 2019. The importance of that is clear from the broader numbers. At 6.5% so far this year, Deutsche’s group return on tangible equity trails the likes of BNP Paribas on 10.6% and Barclays on 16.4%.
Maintaining the pace of transformation in the investment bank is now in the hands of Fabrizio Campelli, the enthusiastic 48-year-old Italian who until February was running the bank’s overall transformation.
Deutsche Bank chief executive Christian Sewing has for some time been signalling that he would need to shed day-to-day responsibility for the overall corporate and investment bank, which he has had since announcing the 2019 restructuring, when former CIB head Garth Ritchie left the firm after 23 years. Earlier this year Sewing handed the business over to Campelli.
It was a deliberate decision to pick our spots. Now it is a matter of taking share as our clients get more confidence in the bank
The rationale was simple enough. The redefinition of the investment bank was done and had become clear to the outside world. Its financial results were back on track. And Sewing had plenty of other demands on his time. Campelli, meanwhile, had realized that at least some of the work he was doing would now be better executed from inside the operating divisions rather than alongside them.
Although Campelli has passed over his group-wide transformation responsibilities to Rebecca Short, who was head of group planning and performance management, he knows that much of his time will be spent thinking about how to carry his previous focus over into his new role. He describes himself as an “agent” of the support that the corporate bank and the investment bank still need.
He breaks that support down into three areas: the client franchise, which needed rebuilding but now needs careful nurturing; conduct and risk management, ensuring that the bank stays “on the side of what is right,” as he puts it; and technology.
Stretching from back office to front office, this last area is the one where Campelli thinks he will be best placed to help by now being embedded in the business. Deutsche might have made great strides in simplifying its operations – former chief executive John Cryan often used to rattle off to analysts the number of legacy systems the bank had retired in any given earnings period – but there is still much to do.
“It is about how to make the transformation follow through inside the organization, through the middle office and back office,” says Campelli. “That would have been harder for me to do sitting alongside the business rather than leading it.”
That’s partly because it will mean ruffling feathers. Picking one particular system out of several that are doing similar back or middle-office tasks inevitably means some people will be unhappy. But it will be easier now that he is running the show.
That kind of detail is likely to be a factor in Deutsche Bank’s ability to succeed, but for external observers it’s the client franchise – its perimeter and its depth – that looms larger in the mind. And here the bank thinks its client intensity strategy is paying off.
At its investor ‘deep dive’ presentations in December 2020, it said it had cut the number of clients that it designates as ‘platinum’ by 10% from the time of the restructuring but had increased its market share with those clients by 22%, with revenues up 25%. Revenues with the bank’s top 100 institutional clients were up 42%.
As far as Campelli and his team are concerned the debate about how the bank would fare without equities was put to bed long ago. Deutsche’s equities franchise had over the years become one that was highly dependent on business with hedge funds, with the result that the bank had a lot of exposure to those parts of the business where it is hardest to make money.
Prime brokerage, in particular, takes up balance sheet, is highly competitive and – as illustrated by this year’s meltdown of Archegos Capital Management, which led to more than $10 billion of losses at its banks – fraught with danger. Careful risk management and quick reactions meant that Deutsche Bank avoided an Archegos hit, despite having some exposure, but the episode still proved the point.
Most people’s risk capital went through the roof in the crisis – ours barely moved
“For Deutsche Bank, equities trading was no longer a trade-off that made sense – it was consuming too much balance sheet and we were never going to close the gap with the leaders,” says Campelli.
He now argues that not only has ditching most of equities not harmed Deutsche’s reputation in the eyes of clients, it has actually enhanced it.
“It has at times strengthened the relationship, because before they might have felt that they were dealing with a lot of strong businesses and one relatively weaker one,” he says. “Clients want to deal with the best counterparty in each asset class.”
It suits him to say this, of course, but to judge by results in fixed income and in equity capital markets – the latter being the area that rivals often said Deutsche would be unable to sustain – Campelli has numbers on his side.
In ECM revenues more than doubled in the last four quarters, to €548 million. And while its European bookrunner ranking remains low – at 12th so far this year with a market share of about 2.3% – that share is 20 basis points or so higher than it was in 2019. And Fedorcik is confident that it is a platform on which to build.
“To succeed in an IPO, you need an industry banker that covers the client, you need to have balance sheet available, you need research and you need competent product people.” In Josef Ritter and Jeff Bunzl, the bank’s co-heads of ECM, it has two leaders that are well respected in the business.
“We have those four critical ingredients,” adds Fedorcik. “The last piece is trading, where we have execution trading. All of these pieces allow us to compete effectively for IPO and follow-on mandates; and it’s working.”
The bank’s fixed income and currency business, the other area where Campelli had feared a negative halo from the decision to pull out of equities, has suffered little disruption, he says. In the last four quarters the bank has gained share in FX, credit and rates, and sits just above Morgan Stanley and just below Bank of America in absolute size, having dropped smaller in the previous period.
At the very start of the pandemic the business consciously dialled back the risk, says Ram Nayak, head of fixed income and currency trading and who has a direct reporting line to Campelli, reflecting the fact that he act as Fedorcik’s partner in leading the investment bank.
“We have gained more market share than any other firm in the industry over the past four quarters,” he says. “Our capital productivity is probably the highest among the big houses.”
The trajectory is very different now. We didn’t have the resources to invest – now we can
Nayak also looks at the Sharpe ratio for the business, taking into account its value at risk or stressed value at risk. “Most people’s risk capital went through the roof in the crisis – ours barely moved,” he says. “We didn’t use more capital and we kept risk down.”
That is partly why he thinks the performance even during the pandemic year will be sustainable. The €7.1 billion revenues from fixed income in 2020 compare to just over €5.5 billion in each of 2018 and 2019. The formal expectation at the bank is to make about €6.5 billion in 2021, but it is already on track for closer to €7 billion. If it manages that, it will be an increase of about 25% in dollar terms on 2019 – even the US banks may struggle to match that.
While Campelli might think relationships might have been strengthened by the new focus in the bank’s markets business, Nayak concedes that success in fixed income is more challenging with no equities business alongside it. But he sees that as evidence that Deutsche’s performance has been even more impressive.
“If you are also in equities, you are able to have more conversations and more opportunities come your way, but the fact that we have been able to do what we have done without that is even more striking,” he says.
But for Nayak the key in 2020 was to show stability and discipline, not to reach the €7 billion-plus result that he ended up with. “Everyone wants to write the story that we took on more risk, but we didn’t,” he says. “We had specific instances where we had the chance to quote on dislocated positions and we chose to say no.”
He thinks something similar to Fedorcik when it comes to client intensity. He says the biggest factor in his business has been changing traders’ mindset. Many of the firm’s senior traders and salespeople have an episodic, structured background, where a trade that has taken weeks to construct needs to be profitable.
But Nayak is shifting that mindset more towards flow, where what matters more is an understanding by the client that the bank will be there consistently. Whether that will drift over time to laziness over profitability remains to be seen, but it hasn’t so far.
As is the case at its rivals, Deutsche Bank’s investment bank has been flattered by the conditions surrounding the pandemic, with extraordinary levels of stimulus driving asset prices and deal making volumes. That posed a unique difficulty for Deutsche, which had embarked on its pre-pandemic transformation with a specific intention to rebalance its portfolio of businesses away from an outsized reliance on the investment bank.
The new-look Deutsche was supposed to be duller and more stable than before, less subject to the earnings volatility of sales and trading businesses that can outperform in one quarter and crash in another. But in the last four quarters the investment bank supplied 40% of the group’s revenues, compared with 30% in 2019.
Campelli concedes the point but also argues that it’s here that a new, disciplined approach at the bank has also been most evident.
“We said in 2019 that we would strengthen all the engines beyond the investment bank, but of course 2020 played out in ways that benefited investment banking fee pools over others,” he notes. “We did well in that context, but we also stayed true to the strategy because we did not increase the resources committed to the investment bank.”
If you’re not calling a client, one of your competitors is
Risk-weighted assets in the investment bank are up about 5% from the start of the pandemic, but much of this reflects tweaks in the regulatory treatment of the bank’s internal models rather than any loading up of risk. And costs are down: non-interest expenses in the investment bank for the last four quarters were 13% below what they were in 2019.
Fears that Deutsche might weaken itself perilously as the pandemic hit have not come to pass. Reporting first quarter 2020 earnings last year, Sewing warned that the bank’s common equity tier-1 (CET1) ratio might drop through its internal target of 12.5% as it deployed extra resources to clients.
In the event, however, the 12.8% CET1 and 4% leverage ratio the bank posted in that quarter marked the lows. More than a year on, CET1 stands at 13.2% and the leverage ratio at 4.8%.
Much of the longer-term sustainability that Fedorcik is hunting will be dependent on rebuilding the bank’s standing in advisory. Historically it was one of the strong suits at Deutsche, but its focus began to wane as the bank’s ambitions to be a truly global player were pursued with abandon. Campelli remembers those days, having begun his Deutsche Bank career in 2004 advising financial institutions.
The change in 2019 was to admit that the bank would no longer “cover the waterfront,” as Campelli puts it. Where the bank could not hope to compete, such as with a small natural resources team in Texas, it stopped trying.
“It was a deliberate decision to pick our spots,” he says. “Now it is a matter of taking share as our clients get more confidence in the bank, as they respond to our improved credit default swap spreads, our credit rating and our share price.”
Fedorcik agrees. “If the client is only hiring one or two advisers, you don’t want to be the bank talking about itself,” he says. Deutsche’s bankers are now in the position where they can spend time talking about their clients rather than their own problems, but the reality is that it still takes years to gain the position of trusted adviser.
That makes advisory a long game, but what encourages Fedorcik and his team is that the bank already has strong positions in sectors like industrials, real estate and leisure, and is finding itself able to hire into others, such as technology and healthcare, particularly in Europe.
What Deutsche’s senior management say they will explicitly not do is hire for hiring’s sake. They talk of the supreme importance of culture: the firm has been burned before by getting that wrong.
“We don’t want to work with people who are bad culture carriers – it doesn’t matter how productive they are,” says Drew Goldman, global head of investment banking coverage and advisory. “We don’t want people who are going to be disrespectful to junior staff, it is just not acceptable.
“Equally, we don’t subscribe to the ‘missed deal’ email. If we don’t get a mandate, I don’t immediately think our bankers have been lazy.”
Practically all the senior leaders in the origination and markets businesses have been at Deutsche Bank – and its predecessor brands in the US – for more than 20 years. They have lived through multiple cycles in the market as well as in Deutsche’s own drama-filled story, but they still manage to sound as if they are excitedly embarking on something new when they talk about the approach under Sewing.
“I have been really impressed with the urgency with which Christian has got us to where we are,” says Goldman. “The trajectory is very different now. We didn’t have the resources to invest – now we can. We can hire selectively and we are on the path to return capital to shareholders from 2022 onwards.”
The combination of experience and energy might be what ends up making the difference this time around. While there have been departures, there is also plenty of institutional memory still stored in those management teams, much of it now recast into cautionary tales about what can happen when a bank’s reach exceeds its grasp.
Those still at the firm generally speak well of Sewing’s predecessor as chief executive, John Cryan, who was the first to tackle the post-2008 crisis reshaping when he replaced Anshu Jain in 2015. But some argue that Cryan also fell foul of the bank’s structure at the very top.
“John was a great transition into let’s take responsibility for our actions, deal with the regulatory issues and the fines, and was always willing to see our clients,” says one banker who spent a lot of time with Cryan in those years. “But I think he was not always willing to make some of the hard decisions, partly because he felt like he was not really in charge.
“Christian acted like a chief executive. He said: ‘The buck stops with me.’ Before, it was more convoluted. People wondered if the buck perhaps stopped with our German supervisory board instead.”
Consistency of management, clarity of strategy and intensity around clients are the three factors that Fedorcik identifies as behind the performance so far. They are three macro themes that many banks take for granted, but it is a long time since Deutsche Bank has had that luxury.
The trick is to keep the bank on the simple, boring and repeatable track that its executives now seem to want more than anything else. But the rival banker was right – shrinking to greatness is hard indeed. The pressure to win only increases as you chase fewer targets.
That’s why Fedorcik is checking that call data every week – after all, banks are only as good as their last mandate and the rivals are formidable. It’s a belief captured in his constant message to his teams: “If you’re not calling a client, one of your competitors is.”
How Deutsche is rebuilding its US reputation
That Deutsche Bank is still playing in the US market seems at times like an oddity. After all, the bank touted its 2019 restructuring as marking a refocus on its corporate clients, particularly in continental Europe, where the origination and advisory business is obviously complementary to a strategy to be the leading investment bank in the region and one of its leading corporate banks.
But the calculation by chief executive Christian Sewing and his team back in July 2019 was that the bank could not afford to cut loose from the US market and still hope to stay credible. It was already shuttering equities by necessity – and was by no means sure how the rest of the business would fare after that. But while the US operations were cut back hard, the thinking was that a business that supported its cross-border clients – both Europeans wanting to be active in the US market and US clients wanting to raise debt in euros, for instance – could be made to work.
“We have a different role in the US and it is also focused on supporting cross-border business,” says Fabrizio Campelli, who now runs the corporate and the investment bank. “We have strong capital markets, financing and advisory capabilities that go back more than 20 years, and those are the core of the franchise.”
Those capabilities go back to its acquisition of Bankers Trust in 1998; a deal that came to epitomize the grand global ambitions that the German bank indulged over the following 15 years, ambitions that would eventually take it from crisis to crisis.
But while Deutsche’s acquisition of Bankers Trust might have marked just another step in the firm’s hubristic journey, it did inject true investment banking pedigree. Bankers Trust had bought investment bank Wolfensohn in 1996 and then 12 months later added Alex Brown, an investment bank that had been founded in 1800.
Much of that pedigree remains and the firm’s bankers say that what matters to clients is that they can bring them good ideas, not where the bank might be headquartered.
“We recently had a sell-side pitch for a fintech company with a venture capital firm that we had not worked with before,” says Drew Goldman, global head of investment banking coverage and advisory. “There was never a discussion about how we were a European bank and this was the sale of a US asset into the US. They told us that we understood the space better than anyone else they had spoken to and were able to bring a unique perspective into the biggest potential buyers.”
Recent history has not been kind to Deutsche’s US franchise. The bank has had regulatory run-ins. It had to cough up $7.2 billion in penalties related to US mortgage securities mis-selling. In 2018, when the bank was buckling under ratings pressure, its US operations failed part of the Federal Reserve’s annual stress test. The Fed said the bank’s controls had “widespread and critical deficiencies.”
Fixing that has taken much longer than executives at the bank would have liked. The Fed was still telling Deutsche that it was sub-standard as the Covid pandemic hit in the spring of 2020. It’s little surprise that Campelli identifies controls as one of his key areas of focus, but it’s also something that has been addressed by a change at the top in the US, with Christiana Riley coming on board as the new regional chief executive in 2019.
Riley’s arrival certainly marked a stabilization. And now the bank looks, if anything, to be doubling down on its US commitment. Fedorcik is based in New York, as is Drew Goldman, global capital markets co-head Sean Murphy and James Davies, head of the institutional client group and head of the investment bank in the Americas.
When Euromoney speaks to them over the summer, they are about to move offices. Reading symbolism into Deutsche’s abandonment of what its staffers affectionately know as “60 Wall”, sitting in the heart of New York’s traditional wheeling and dealing downtown, might be a step too far. But there’s certainly a message in the bank investing in shiny new offices in mid-town’s Columbus Circle: Deutsche Bank is not planning on leaving any time soon.
And nor should it, while the US accounts for nearly two-thirds of the fee pool, says Fedorcik. “You have to be here,” he says. “And we have our highest market share of fees in the last three years now. We are doing something right.”
Others are more frank. “We are not saying that we are the new Goldman Sachs, but we are also not saying we are just the European tourists in town,” says one senior banker.
But Deutsche is picking its spots, certainly in comparison to the days of the Bankers Trust acquisition and the rampant poaching of teams – many from Credit Suisse – at the start of the millennium. Its approach to the special purpose acquisition company frenzy is a good example, where it has focused on those repeat sponsors that are displaying proven success.
“The intention in the old era was to grow to be a full scale competitor to US banks in this time zone across all products,” says Davies. “Then the big shift in 2019 was to exit equities, at which point it became a different strategy.”
He was one of those tasked with talking clients through that change. He says they understood it, but were equally forthright that they would expect the bank to deliver on its new, leaner model. “Clients were very clear with us: if you are withdrawing from equities because that business didn’t work for Deutsche, we get it, but now we will test you on the depth of your fixed income perimeter.”
That trust was rewarded, Davies argues. “Fast forward to the beginning of 2020 and we saw the ultimate test of liquidity and deployment in the businesses we retained,” he says.
“If you look at our positioning in March and April 2020, for example, our debt capital markets issuance, our US rates business, our commercial real estate franchise, our lending to mid-market platforms – we had depth of liquidity and we stayed the course, and we’ve continued to perform strongly since then.”
: Deutsche bank stock crash
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