Market cap shrinks

Deutsche Bank's latest stock tumble isn't just about Italy

Deutsche Bank Imago combined 0202539003 1800px
Ouch. Source: Imago, Handelsblatt

When things can’t get any worse, they sometimes do. Deutsche Bank’s listed equity is a case in point. On Tuesday, even as investors were still digesting CEO Christian Sewing’s recent announcement of deep job cuts at the bank, its stock price flirted with historic lows on concerns that Italy’s political upheaval may compound troubles at Germany’s largest lender.

To be sure, things aren’t (yet) as dire as in late 2016, after the US justice department levied a huge fine on Deutsche for shady mortgage deals. At the time, its stock price tumbled to an all-time low of €9.42 ($10.88); on Tuesday, it plumbed €9.72 before recovering slightly on Wednesday. Another warning sign of investors’ concerns, the risk premium on credit default swaps (which allow for hedging against bond defaults) has almost doubled for Deutsche Bank since the start of the year.

Neither the European Central Bank, which is in charge of supervising Deutsche Bank, nor the bank itself would comment on the latest price fall. Granted, Europe’s financial shares have been bruised more than most by fears Italy’s new government would destabilize the euro zone or even withdraw from the common European currency. Deutsche, in addition, has been beset by litigation risks, sluggish earnings and a weak capital base for years.

A merger with Commerzbank isn't seen as a solution to Deutsche's problems. It needs a bigger partner.

Some analysts expect the shares to keep falling. Barclays has a share price target of €8 and Citigroup is almost as downbeat, saying it could drop to €8.30. Analysts at Swiss bank UBS, meanwhile, have stuck to their forecast of €12.

The upshot is that there’s doubt about whether Mr. Sewing, Deutsche’s new boss, can turn the bank around even with his radical plan to shed more than 7,000 jobs and shrink its once-proud investment banking business back to health. Despite the costly revamp, he is sticking to Deutsche’s goal of a post-tax return on equity of 10 percent by 2021 – a goal that experts at UBS find unrealistic. The German bank’s cost base would have to fall well below its stated €22 billion, and its income would have to increase to around €32 billion; many analysts expect the latter to stagnate around €26 billion.

Amit Goel, an analyst at Barclays, said Mr. Sewing isn’t being radical enough in his cutbacks. The problem is that Deutsche Bank likely couldn’t afford bigger layoffs, and as this realization sinks in, calls are growing for a merger with Germany’s second-biggest commercial bank, Commerzbank. It’s not a new idea: The two banks considered it in 2016, during a brief courtship that failed to blossom. Their bosses ultimately decided to stay independent and sort their problems out separately.

“It’s going to be difficult for Deutsche Bank on its own,” said the CEO of one large European bank, adding that even a tie-up with Commerzbank wouldn’t solve Deutsche’s problems. Instead, it would need a bigger partner such as France’s BNP, the CEO said.

Deutsche Bank AG Chief Executive Officer Christian Sewing Attends Annual General Meeting As Lender Announces 7,000 Job Cuts
Christian Sewing up to his neck in problems. Source: Bloomberg

The next possible setback is already looming. In the next few days, rating agency Standard & Poor’s could make good its threat to cut Deutsche Bank’s rating after putting it on “credit watch” in April. Such a downgrade could become a “negative catalyst” for Deutsche, warned Mr. Goel – meaning a trigger for further share turmoil.

On top of that, there’s the Federal Reserve’s annual stress test of big banks, the results of which are due to be published by the end of June. Deutsche Bank failed it two years running. In 2015, the Fed complained of “numerous and significant deficiencies” in areas including internal controls; in 2016, it said “broad and substantial weaknesses” persisted in capital planning and risk management. In 2017, Deutsche passed the test.

“Developments at Deutsche Bank give real cause for concern,” said the head of the opposition Free Democratic Party, Christian Lindner. He blamed the bank’s woes on its many changes in strategy and its failures in investment banking. “But the bank must do its homework alone without political help,” he added.

Michael Maisch and Yasmin Osman reported this story for Handelsblatt from Frankfurt, while Thomas Sigmund reported from Berlin. Astrid Dörner is a correspondent in New York City. David Crossland adapted this story into English for Handelsblatt Global. To contact the authors: maisch@handelsblatt.com, osman@handelsblatt.com, sigmund@handelsblatt.com and adoerner@handelsblatt.com

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