This Is a Big Problem for Deutsche Bank Stock
Deutsche Bank AG (USA) (NYSE:DB) was trading more than seven percent higher on February 10. Deutsche Bank stock found some oxygen after hinting it plans to issue a bond buyback program to prop up the price of its funds. DB stock lost some $2.3 billion in market cap on February 8, dropping to an annual low share price of $15.38. Just a month ago, DB stock was trading at the $20.00–$24.00 level. In Frankfurt, DB shares, which used to trade at €177 (approximately US$185.00), tanked to €5.54 (US$17.00)—an all-time low—on February 2.
It doesn’t help that Deutsche Bank lost €6.8 billion (US$7.68 billion) for the year ended December due to the persistent low interest rates. And those rates could go lower rather than higher.
In the good old days, banks relied on net interest margin, which is the difference between their lending rate and the rate at which their interest-earning assets bring in income. (Source: “The slow-motion crisis for global banks is picking up speed—and it’s simpler and scarier than you think,” Business Insider, February 10, 2016.)
But that’s not a viable way to make money in the post-crisis, low-interest-rate era. Central banks have held rates at or below zero since 2009. Now, some $6.0 trillion of interest-yielding assets are in negative rate territory, making the margin game impossible.
Deutsche Bank’s CEO, John Cryan, has assured investors that the bank is “Absolutely rock solid” and that its fundamentals are strong. Yet Cryan’s statement only served to accelerate DB stock’s downward spiral. Despite today’s “espresso” shot on the markets, Deutsche Bank has triggered a European banking crisis. The group and its investors will have to address bad loans in DB stock’s portfolio. The problem evokes eerie memories of Lehman Brothers and Bear Sterns in 2007 and 2008.
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The Financial Times says that the alleged buyback revolves around DB’s higher-quality bonds. Therefore, it would probably exclude the riskier contingent convertible bonds (CoCos). (Source: “Deutsche Bank considers multibillion-bond buyback,” The Financial Times, February 9, 2016.)
Credit default swaps (CDS) activity has intensified, as investors run for cover against a possible default. They fear contagion. Deutsche Bank carries one of the heaviest derivatives burdens of any financial institution in the world.
Certainly, the European Union (EU) and German government will do everything to avert Deutsche Bank’s collapse.
The “too big to fail” theory holds that banks are so large and bound that they would topple the entire economic system if allowed to crash. Therefore, the authorities will save Deutsche Bank.
Yet, even if rescued, DB stock will still dent the international financial markets. These have already endured a dismal year-to0date performance. The effects could be even more destructive than the Lehman Brothers collapse.
In today’s interconnected world, when a bank as large and exposed as Deutsche Bank fails, it sets off a domino effect. The entire banking sector is at risk of collapse. The links are so entrenched that nobody can predict what exactly could happen. And of course, markets hate uncertainty.
Jeff Gundlach, DoubleLine Capital hedge fund manager, sees shadows of the 2008 banking crisis behind Deutsche Bank. He deems the scenario of financial stocks, particularly in Europe, trading lower than the 2008 crisis as “frightening”:
“We see the price of major financial stocks, particularly in Europe, which are truly frightening. Do you know that Credit Suisse, which is a powerhouse bank, their stock price is lower than it was in the depths of the financial crisis in 2009? Do you know that Deutsche Bank is at a lower price today than it was in 2009 when we were talking about the potential implosion of the entire global banking system?” (Source: “Gundlach Calls Financial Stocks Below Crisis Prices ‘Frightening’,” Bloomberg, February 5, 2016.)
Deutsche Bank has left the markets vulnerable and its investors anxious. They worry about DB managers’ ability to deliver redemption at the end of the company’s two-year turnaround plan announced last October. (Source: “No easy way out for Deutsche Bank as investors ‘lose faith’,” Reuters, February 9, 2016.)
The backdrop of a delicate economic outlook and negative interest rates only add to investors’ grief. Certainly, few investors believe that Deutsche Bank has any hope of a prompt recovery, meaning DB stock could sink further still.