Record Decline

Kicked Out of the Top League

The twin tower skyscraper headquarter offices of Deutsche Bank AG stand in Frankfurt, Germany, on Monday, July 25, 2016. Deutsche Bank Chief Executive Officer John Cryan will try to convince investors this week that his efforts to turn around Europe's biggest securities firm will succeed. Photographer: Martin Leissl/Bloomberg
Deutsche Bank's share price is failing to reach the heights it once did.
  • Why it matters

    Why it matters

    The index setback shows just how far Deutsche Bank has fallen compared to its rivals, and could be a worry for Europe’s largest economy.

  • Facts

    Facts

    • The Stoxx Europe 50 includes the 50 most valuable companies across 18 European countries and is updated quarterly.
    • Deutsche Bank and Credit Suisse were removed from the index in the latest update as their market capitalization has fallen out of the top 50.
    • Shares in Germany’s two largest banks – Deutsche Bank and Commerzbank – have lost more than half their value in the past year.
  • Audio

    Audio

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It was another massive sell-off of European banking stocks on Tuesday, as investors are increasingly withdrawing their confidence in the future of some of the biggest banks on the continent.

Germany, Europe’s largest economy, is bearing the brunt. Shares in the country’s two largest financial firms, Deutsche Bank and Commerzbank, were once again pushed to historic lows by worried investors, who fear that both banks may soon need to shore up their reserves.

For Deutsche Bank, the collapse in its share price over the past year has had some serious consequences: Germany’s largest bank has toppled out of the top league of companies in Europe.

Shares in Deutsche Bank will not be traded on the Stoxx Europe 50, an index of the 50 most valuable companies in Europe, after August 8. That’s the result of a quarterly update of the index’s make-up announced Monday night.

The news sent Deutsche Bank’s share price plunging to another record low in trading Tuesday. It was down more than 4 percent, falling as far as €11.22 before recovering very slightly in the afternoon to close at €11.24 – its lowest-ever close.

The falling share price and index declassification mark a historic setback for Germany’s largest bank, which has long been among the biggest financial players in Europe and once had designs on becoming one of the world’s largest investment banks. It also means that passive investors trading in index funds may no longer hold the bank’s shares.

But it’s not as if another German rival will take its place. Commerzbank, the country’s second-largest bank, performed even worse than its larger rival on Tuesday – leading a sell-off on Germany’s blue-chip DAX for the second straight day – after the bank announced it was abandoning its €1-billion profit goal for this year.

Commerzbank shares were down more than 9 percent to €5.24 by the end of trading in Frankfurt. Like Deutsche, the Frankfurt-based bank has lost more than half its value over the past 12 months.

It marks a historic setback for Germany’s largest bank, which has long been among the biggest financial players in Europe.

It’s a major embarrassment for Europe’s largest economy: Germany is left as the only major European country without a banking champion.

To be sure, Deutsche Bank and Commerzbank are not alone with their troubles. European banking stocks have been hit across the board this year. The banking index Stoxx 500 fell another 3 percent on Tuesday. Investors are especially targeting those banks that performed worst in the European regulators’ latest round of stress tests released over the weekend.

While they didn’t fail, Deutsche Bank and Commerzbank were among the worst performers in that stress test, but other major banks like Italy’s Unicredit are also taking a major hit from investors.

“Clearly the market is realizing that it’s not looking good for the entire European banking sector,” market analyst Jens Klatt of JFD Brokers told Handelsblatt.

Still, there are 10 other banks that have held their place in the Stoxx Europe 50 index – at least for now. Even Italy, a country where the government this week agreed to another bailout of its financial sector, still has a banking champion: Intesa Sanpaolo.

118 Deutsche Bank - Neu 2016-05-13-01

 

For the index, Deutsche’s fall from grace is not a value judgment on the bank’s fortunes but a simple statement of fact: The Stoxx Europe 50 will no longer list the bank’s shares as they have fallen so much that its market capitalization is below that of Europe’s top 50 companies.

Credit Suisse also tumbled out of the index, though Switzerland still has another banking player represented in UBS, the world’s largest asset-management bank.

Instead of Deutsche and Credit Suisse, the stock listing will now include Vinci and ASML, a French construction company and a Dutch supplier to the semiconductor business.

Both financial firms have watched their share prices tank over the past year as they face similar challenges. Investors have criticized them for not having a clear strength, a source of consistent profits or growth prospects.

Deutsche Bank’s market capitalization has dropped to just €15.6 billion as its share price fell more than 60 percent in the past year. In 2007, before the financial crisis, it was once above €100, but those days are now long gone.

Deutsche Bank built itself up as Europe’s largest investment bank, challenging global players in the pre-crisis period. But its strength in trading has evaporated in recent years amid record low interest rates and tough new government regulations imposed since the 2008 financial collapse.

Shares in Credit Suisse have fallen by a similar amount in the past year. Switzerland’s second-largest bank is valued at just over €20 billion.

Deutsche Bank has the consolation that it remains a member of the Euro Stoxx 50, which lists the 50 most important shares in the 19-nation euro zone. Credit Suisse has never belonged to the listing as it is a Swiss company.

The Stoxx Europe 50 by contrast lists continental Europe’s 50 biggest companies, including British, Swiss, Danish and Swedish firms that are not in the euro index. Stoxx operates Deutsche Börse’s index business and is co-owned by Deutsche Börse and Six Group.

commerzbank-bloomberg
Commerzbank may have the largest tower in Frankfurt, but its share price continues to hit new lows. Source: Bloomberg

 

Deutsche Bank’s demise may once have been seen as an opportunity for its top rival Commerzbank, but Germany’s second-largest bank has made a sport out of disappointing investors of late.

A profit warning announced Tuesday should have come as little surprise. Commerzbank, which is still part owned by the German government, had already admitted last week that first-half profits fell 40 percent to €372 million ($416 million), making its goal of hitting the €1-billion mark for 2016 increasingly unlikely.

And yet, Commerzbank succeeded in shocking investors for the second time in a week. Chief Financial Officer Stephan Engels confirmed that the target was out of reach on Tuesday – but investors were more focused on the details of the bank’s depressing first-half results.

“The bank’s operating result was worse than expected,” Helmut Hipper, a fund manager with Union Investment, told Handelsblatt.

That’s because Commerzbank’s profits have been hit across the board – even in sectors that have traditionally been a strong suit. The bank reported that operating profit from corporate lending fell 40 percent to €412 million as record-low interest rates across Europe have dented earnings. The bank is Germany’s biggest lender to small and medium-sized businesses.

Earnings at Commerzbank are being hit hard by record low interest rates in Europe. Ingo Frommen of LBBW said Tuesday’s results should serve as a “major wake-up call.” For Deutsche Bank, the bank’s biggest risk continues to come from the legal side, with billions of settlements and fines for past wrongdoing potentially still on the cards.

With every poor result, the pressure is growing both on Deutsche Bank Chief Executive John Cryan – who joined the bank last July – and Commerzbank Chief Executive Martin Zielcke, who took the helm only this past May.

Both executives are pleading for patience and insisting that – despite the share price troubles – the bank remains stable. Mr. Cryan’s bank is in the middle of a massive restructuring that he says will put the bank in a position to grow again in 2018. Mr. Zielcke plans to discuss his own turnaround strategy with the bank’s non-executive supervisory board in September.

They may have only been in the job for a year or less, but both are increasingly facing impatience from shareholders.

 

Christopher Cermak is an editor with Handelsblatt Global Edition in Berlin, covering finance and economics. Frank Wiebe is Handelsblatt’s senior financial correspondent based in New York. Michael Brächer covers Commerzbank for Handelsblatt in Frankfurt. Yasmin Osman of Handelsblatt and Allison Williams of Handelsblatt Global Edition also contributed to this story. To contact the authors: cermak@handelsblatt.com, braecher@handelsblatt.com and wiebe@handelsblatt.com

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