Financial Fears

Losing All Wiggle Room

Deutsche Bank Chief Executive Cryan attends a news conference in Frankfurt
Deutsche Bank CEO John Cryan won't be out of the woods for a while.
  • Why it matters

    Why it matters

    In principle, investors consider Deutsche Bank to be worth more if it is broken up. Mr. Cryan has an uphill battle convincing them otherwise.

  • Facts


    • Before the 2008 financial crisis, Deutsche Bank’s share price was more than €100, or about $113. On Wednesday it closed at €14.58.
    • Shares are down about 35 percent since the beginning of the year.
    • Germany’s finance minister, Wolfgang Schäuble, declared publicly he wasn’t worried about the bank’s health.
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There was probably some relief in the executive suites of Germany’s largest bank – at least for one day.

On Wednesday, Deutsche Bank managed to stop a dramatic sell-off that dropped shares to a 30-year low. Thanks to reports that it might buy back billions of euros in debt, the battered financial institution recovered mid-week and even numbered among the big winners on the stock market.

But new chief executive John Cryan knows very well that it’s just a short respite in a long, uphill struggle. On Thursday morning, the stock again resumed its downward path.

After all, what should investors think of a bank that has to assure creditors it has enough cash on hand to pay its riskiest debts? Even Germany’s finance minister, Wolfgang Schäuble, felt compelled to declare he wasn’t worried about the bank’s health.

Such public statements show how disquieting the situation really is.

As an export nation, Germany needs a world-class financial institution, and only Deutsche Bank can play this role in the foreseeable future.

The naked data tells a blunt, doleful tale: Within a single month, the bank lost a fourth of its market value. Over the past year, its market capitalization has been halved. The share price is languishing below €15; before the 2008 financial crisis, it was more than €100, or about $113.

At the moment, investors value the Frankfurt-based bank at less than a third of its book value. In principle, they consider the bank to be worth more if it is broken up than if it continues to do business. Deutsche Bank’s valuation is even worse than that of such competitors as Credit Suisse or Barclays, which are also stuck in restructuring.

The real problem is that the dramatic decline in share price is not an exaggerated reaction by panicking investors. It is entirely rational.

Mr. Cryan’s challenge to put the house in order was already tough. Now, after the turbulence to start 2016, his job has become a veritable Sisyphean task. The pressure to act is growing even as his options shrink.

All European banks are now undergoing a painful process of revaluation. Ever since the financial crisis, investors had hoped for a return to attractive profits. Now they realize that, at least for the foreseeable future, it will be very difficult for the financial industry to earn money.

A few reasons for this plight have been known for a good while: Tougher regulation and chronically low interest rates are eating up margins.

What’s new are the fears of a substantial economic downturn and a higher rate of defaults. That would affect all banks, but have hit Deutsche Bank particularly hard.

Mr. Cryan has already told investors to expect two more lost years. If revenues and profits dwindle even further, there will be less money for the expensive restructuring, which could turn into a grueling ordeal.

Almost none of the bank’s large shareholders doubt that Mr. Cryan has correctly identified the weaknesses and initiated the best measures he can. The trouble is that, at the moment, it’s still very hard to see how Deutsche Bank can emerge from this quandary of its own making, brought on by postponing needed reforms for far too long.

How complex the predicament is can be seen in its retail unit, Postbank. Divesting this subsidiary is one of the cornerstones of Mr. Cryan’s new strategy. But the timing couldn’t be worse for a sale or a flotation.

On Wednesday, news reports quoted sources as saying the bank was prepared to write down Postbank’s value by one-third. But Deutsche Bank can scarcely allow itself to do that now without further inflaming rampant fears of a new recapitalization.

The bank has already asked shareholders for money three times since 2010. If Mr. Cryan had to try to drum up billions more at the current share price, it would be something like a declaration of bankruptcy. So it’s no wonder that the Briton prefers to keep silent and hope that somehow things will work out in the end. There is little room for mistakes.

The sad thing about the whole mess is that it affects not only a few bankers in Frankfurt, London and New York, but also the entire domestic German economy.

As an export nation, Germany needs a world-class financial institution, and only Deutsche Bank can play this role in the foreseeable future. There is no other choice but to cross one’s fingers and hope investors give Mr. Cryan enough time to guide the arduous restructuring to a successful conclusion.


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