The amazing survival (so far) of Deutsche Bank
A year ago it announced a new CEO followed by a $2.5 billion fine for rigging Libor and a massive cost reduction. That was just a curtain-raiser.
In January, it announced a €6.8bn loss; in February, the CEO told staff that the bank is rock solid — a very bad sign indeed; in March, it disclosed €52bn worth of derivatives on its books and then, on June 29, the IMF put out a report containing this statement: “Deutsche Bank appears to be the most important net contributor to systemic risks in the global banking system.”
The very next day, the US Federal Reserve followed up by announcing that Deutsche had failed its stress test.
By July, the share price had halved, but Deutsche Bank was — groggily — still standing.
Why any depositor would stick with a bank after all that is anybody’s guess, but, incredibly, it survived.
Then last month, what should have been a killer blow: a leak that the US Department of Justice was demanding Deutsche Bank pay US$14bn, which was roughly equivalent to its then total market value, and almost triple what it had in provisions for lawsuits and fines.
On September 16, Deutsche Bank shoved out a press release confirming the “market speculation of an opening position by the DoJ of US14bn, and that the DoJ has invited the bank as the next step to submit a counter proposal”.
This has repeatedly been referred to since then as a “fine”, but it’s nothing of the sort. It’s some sort of weird invitation from the DoJ to settle civil claims in America against Deutsche.
Why has the DoJ inserted itself in these civil cases, with an opening gambit in some kind of negotiation, and then apparently leaked the fact?
Can you imagine the Australian Government getting involved in civil claims against a bank, acting as a negotiator on behalf of the claimants no less? Very weird.
Anyway, in its statement on September 16, Deutsche Bank said it has “no intent to settle these potential civil claims anywhere near the number cited. The negotiations are only just beginning.”
Nevertheless, “$14 BILLION FINE”, shouted the headlines, completely incorrectly.
Last week, Agence France-Presse, quoted “sources” that the DoJ was willing to settle for US$5.4bn. It seems possible that the “source” was Twitter, but in any case it has not been confirmed.
Then on Saturday, the Frankfurter Allegemeine Zeitung reported that Deutsche bank executives were heading to the US “in coming days” to negotiate a settlement. No sources were quoted and the bank didn’t comment.
Meanwhile, the share price fell to a new low last week and the price of its credit default swaps went to double the average for European banks, which is saying something.
Still, depositors left their money in (so far). Why? Probably for three reasons: First, which European bank are you going to move your money to, where it might be safe? Secondly, you know Angela Merkel will have to rescue Deutsche Bank, despite the denials, and, third, this is really an equity problem, not a liquidity or solvency one.
Deutsche Bank seems to have almost as much in liquid assets as the entire Australian banking system (€220bn).
Hedge funds shorting Deutsche Bank this year have been betting not that it will go bust, although they’d be perfectly happy with that outcome of course, but that it will have to raise equity — even before the stories of a $14bn US “fine”.
Its current Tier 1 capital ratio is 10.8 per cent, versus a self-imposed target of 12.5 per cent by the end of 2018. If it really had to pay out US$14bn to settle American civil claims, the ratio would fall to 7.5 per cent.
It apparently has provisions of US$5bn for civil payouts, so anything at or below that amount would be covered and not require more equity.
So, if management gets the US payouts down to that level, Deutsche would need to raise about €5bn within two years to make its Tier 1 target. With the share price hovering around €10, that will mean a big dilution, but it’s not impossible, and it certainly means the hedge funds that are short the stock are on solid ground.
All that assumes no further surprises, which is a big assumption given what has been going on over the past 12 months, but if Deutsche Bank’s retail depositors have stuck with it through all that, you’d think they would stick through just about anything.
So Deutsche Bank should survive, although given the need to raise capital it will be long time before the share price recovers.
Alan Kohler is publisher of The Constant Investor — www.theconstantinvestor.com
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