Bad news bearish

Deutsche Bank stressing out about US stress tests

Deutsche Bank NY Reuters edited 34657152 1800px
Wall Street's cops are on the beat. Source: Reuters

Bad news continues to swamp Deutsche Bank, making it look more than ever like a company circling the drain. Analysts believe Germany’s largest bank will fail this year’s round of stress tests from the US Federal Reserve. Results are due out over the next week.

“I don’t think anyone would be surprised if Deutsche Bank fails the stress tests,” said Karen Petrou at regulatory analyst Federal Financial Analytics. “It would be more of a surprise if it passed.”

The concern is less over the quantitative stress test where liquidity and capital coverage are scrutinized in various scenarios, and more over the qualitative assessment that allows regulators to impose specific requirements to correct deficiencies. Deutsche Bank failed the stress tests in 2015 and 2016 and the outlook for this year is not promising. The news emerged late last month that the US deposit insurer FDIC had placed Deutsche on its troubled bank list and that the Fed had listed it as a “problem bank” several months ago.

The Fed will release the quantitative results June 21 and the qualitative June 28.

Teetering on edge

It would be more bad news since successive restructuring plans have failed to convince investors the bank has found its way back to profit. An abrupt change of chief executives in April did not stop the stock’s slide. In fact, the stock has fallen 20 percent since Christian Sewing took over from John Cryan and 40 percent in the year so far. It now trades consistently below €10 ($11.60).

The bank’s position has become so precarious that geopolitical analyst Laura von Daniels suggested in a Handelsblatt opinion piece this week that if the government is forced to rescue Deutsche it might become a vehicle for evading US sanctions on Iran.

It is the Comprehensive Capital Analysis and Review (CCAR) — the qualitative review — that Deutsche has trouble with. After the German parent injected capital into the US unit, that became less of a concern and it was financial controls and risk monitoring that US regulators found lacking.

Putting Deutsche on the problem bank list doesn’t influence the stress test in principle, but as a practical matter it creates a challenge for regulators. “The Fed is thus in a difficult position,” said bank analyst Chris Whalen. “I don’t see how the central bank can let Deutsche Bank pass.”

Heading for the exits

Beyond any regulatory restrictions that might result, another failing grade would cause further reputational damage to a bank already battered by years of scandal, fines and losses. Several recent departures suggest that many insiders are giving up on the bank and getting out while they can. US merger specialist Charlie Dundree recently took his leave. Most of the “quant-strat” team that strategizes for hedge funds has departed. Also, some highly seasoned traders in convertibles have left. Some of these losses may be due to Deutsche’s plan to trim the workforce but there are many they would no doubt have preferred to keep.

“Deutsche Bank no longer has the same reputation as before, which automatically enticed people,” warned one headhunter. This is especially true in the global financial centers of London and the US. Another failed stress test won’t help.

Yasmin Osman, Astrid Dörner, and Carsten Volkery cover banking and finance for Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the authors: osman@handelsblatt.com, doerner@handelsblatt.com, volkery@handelsblatt.com, and d.delamaide@extern.handelsblatt.com.

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