10 Questions

Deutsche Bank's Road to Penny Stock

New Cryan Montage
Some shareholders in Deutsche Bank are beginning to think that designated CEO John Cryan is not going far enough, fast enough to right Germany's top financial institution.
  • Why it matters

    Why it matters

    The German government, the business sector and investors are all concerned that Deutsche Bank could be facing a prolonged crisis.

  • Facts

    Facts

    • Investors fear Wednesday’s rebound in Deutsche Bank’s shares, driven by reports of a buyback plan for billions of euros of its bonds, may be short-lived.
    • The bank’s market capitalisation has slumped to a point where it could become a takeover target — but its problems will likely put off any predators.
    • Many European banks face similar problems — falling margins, restructuring programs and recession fears.
  • Audio

    Audio

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These are dramatic, rollercoaster weeks for Deutsche Bank and its chief executive John Cryan. Its share price had plunged 40 percent since January 1 on fears not just over its profitability but its creditworthiness as well. On Wednesday, its shares shot up as much as 17 percent over the course of the day. Then, Thursday morning, it was once again down more than 7 percent. That kind of volatility is typical of penny stocks, not blue chips like Germany’s flagship bank.

Wednesday’s stock surge was triggered by reports that Deutsche was considering buying back several billion euros of its debt to shore up the value of its securities. Analysts are concerned that the recovery will be short-lived. What’s going to happen now? Handelsblatt answers 10 questions on the crisis at Deutsche Bank.

Why are investors so nervous?

Deutsche Bank is at the start of an extensive restructuring and has said it will scrap its dividend for two years. It’s totally unclear how successful the revamp will be and there are fears that the costs of the multiple legal risks it faces from thousands of lawsuits could eat into its profits and capital. Investors are also concerned that Mr. Cryan could be cutting back the bank’s operations too radically, leaving it with no area to grow. Those fears appeared to be borne out by the fourth-quarter 2015 results showing a 30-percent slide in revenue at the investment bank and an overall loss for the quarter of €2.1 billion, mainly due to writedowns, litigation charges and restructuring costs. For the year, the bank posted a record €6.8-billion loss.

 

A Record Loss for Deutsche Bank-updated feb 1 2016

 

Are the problems unique to Deutsche Bank?

No. Many of Europe’s top banks are being restructured and are weighed down by tougher regulatory requirements and low interest rates, which are squeezing margins. The concern is compounded by fears of a global recession that has rattled stock markets, and which would exacerbate the decline in earnings.

Why are investors worried about Deutsche Banks creditworthiness?

The legal risks remain incalculable. And if earnings plunge as well, there’s a growing risk that the bank will be unable to service certain bonds and that its equity capital may crumble. Chief Financial Officer Marcus Schenck conceded at the annual results news conference two weeks ago that an excessive loss in 2016 would cause equity capital problems. On Monday, the bank insisted it had enough reserves to pay the coupons on its highest-risk debt, known as Contingent Convertible Bonds, or CoCos, this year and next.

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