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Deutsche Bank, where do we begin? Once upon a time, it was seen as one of Europe’s strongest bank. But the German bank has been plagued by a series of issues. If we take a look at the bank’s stock price over time, we can observe that after recovering from the financial crisis in 2008, the company lost 85% of its market value. And today we will explore some of the reasons for that decline.
Deutsche has paid 18 billion dollars in fines this decade, with more than 10 billion dollars occurring in the last five years. In 2015, it was fined 2.5 billion dollars by US and UK regulators for its role in rigging the Libor. Moreover, in that same year, it was further fined 258 million dollars for violating US sanctions against Iran and Syria.
In 2008, Deutsche was among the leaders in mortgage-backed securities. Not only was it selling toxic investments but it was also betting against the products it sold. However, it faced the consequences in September 2016. It was fined 14 billion dollars in connection with mis-selling mortgage securities in the US, but eventually settled with the US Department of Justice for 7.2 billion dollars.
Besides that, Deutsche was allegedly involved in a money-laundering scheme called the Global Laundromat. Russian criminals used the scheme to move 80 billion dollars to the US. 10 billion of that amount was traced to Deutsche, resulting in a 630 million dollar fine to the bank in 2017.
Did the string of fines end then and there? Not quite. In 2018, the bank was fined 205 million dollars for negligence in forex trading oversight that occurred between 2007 and 2013. With all these examples, we have only presented the major fines in this episode. There are still many more fines that have been issued to Deutsche bank.
Deutsche’s ties with Trump did not help its situation either. The bank loaned around 2.5 billion dollars to finance projects undertaken by Donald Trump over the last two decades. The problem is that the bank continued to provide loans to Donald Trump even though his eponymous company defaulted on a 640-million-dollar loan.
Trump even went so far as to blame Deutsche Bank for his inability to pay the money back. Moreover, a Forensic News article detailed how some of Deutsche bank loans to Trump were underwritten by subsidiaries owned by Russian VTB Bank.
The bank is definitively losing investor confidence, trading 3 to 4 times less than its book value. The interest rate climate set by the European Central Bank, or ECB, is not helping either. In 2014, the ECB decided to take interest rate into the negative territory to stimulate the economy. However, this meant bad news for banks as they are effectively paying for their reserves to be held with the central bank, thereby lowering their profitability.
According to Bloomberg data, Deutsche Bank’s 2018 expenses as a percentage of income is the highest amongst all banks. You might ask how is Deutsche still operating after the billions of dollars of fines it paid and high expense margin? Well, since 2010, investors poured in more than 29 billion euros into the bank. Some investors are counting on the fact that excluding the one-time adjustments such as fines, the bank is actually solvent and close to profitability. All that is needed is a strong turnaround strategy to get Deutsche out of its situation. And this is exactly what the bank is promising.
Deutsche is attempting to separate unprofitable divisions and focus on core ones. In the summer of 2019, it planned to set up a bad bank to house toxic assets, including its derivatives. But the problem is not the derivatives themselves. New regulations require banks to hold more capital against them, which represent an opportunity cost to revenue generating investments. In Deutsche Bank’s case, they could use that tied up capital to help in their restructuring process.
In an attempt to help Deutsche, the German government supported a merger between Deutsche and Commerzbank to create a strong national bank. However, the deal fell down the drain as the risks and costs of the merger did not outweigh potential gains.
Deutsche latest plans to reduce cost by 6 billion euros, unveiled in summer 2019, included shrinking its workforce by 20% and exiting its Global Equities and trading business by 2022. It already made some progress in selling business units, with its prime brokerage business being sold to BNP Paribas at the end of 2019.
During all these years of turmoil, Deutsche made several changes to top management. Josef Achermann stepped down as CEO in 2012 and John Cryan took over. Cryan then stepped down in 2018 and was succeeded by Christian Sewing.
Various turnaround strategies to save the bank were put in motion but have not yielded tangible results. So where does Deutsche go from here? Is it the next Lehman or can it claw its way back from the grave it dug for itself?