Deutsche Bank: Should We Be Worried?

It’s well known by now that Deutsche Bank is in trouble. From its rising legal costs, to its eroding returns in a low growth environment, there’s a real possibility that the bank could fail. This should be worrisome for all of us. Deutsche Bank, which has operations in over 70 countries and more than 100,000 worldwide, has a high-risk culture and deep connection with other institutions. If it were to fail, it would have a more profound effect than Lehman Brothers, according to financial analyst Dawn J. Bennett.  The bank’s assets are an estimated $1.7 trillion, which equates to about half of Germany’s GDP from a balance sheet perspective.

A key indicator of the bank’s distress is its stocks are now trading at about $14 a share— a significant low compared to its $29 peak in the past year and its all-time high of about $160 in 2007. As the worry increases, the bank will suffer a crisis of confidence. As a result, investors could start to pull their investments from the bank, with depositors pulling out their money.

If it gets to that point, would the German government or European Central Bank bail them out? German Chancellor Angela Merkel has said publically said she won’t bail out or bail in the bank.

“If she [Merkel] actually means that, despite the I.M.F.’s belief that, since Deutsche Bank is of ‘systemic importance,’ authorities will carefully monitor (and supposedly act upon) the situation, then the fallout could be huge,” says Dawn J. Bennett. “And she has every reason to mean it. Germany, which has insisted that Italy and other countries in the ECB accept tough conditions in dealing with their problems, can ill-afford being seen as soft on their own flagship bank.”

As things worsen, the bank is left with very little options.  According to Bennett, “One is to sell their equity in order to provide much-needed liquidity. Another is to approach the European Central Bank (ECB) for a liquidity bridge, an option that has been advocated against by Merkel and denied by the ECB in the case of Greek and Italian banks. A third is that they could eliminate billions in unsecured claims and deposits, which could lead to a full-blown, systemic bank run as depositors everywhere rush to withdraw their savings. No good options here.”

In addition to Bennett’s analysis, a recent study found that the stock market’s valuation of the bank is much less than the company’s valuation. The stock market gives the bank a valuation of around $15 billion, which was generated by multiplying the number of shares by the stock’s price. However, the company says its net worth is $68 billion— four times greater. This shows that Deutsche Bank may be too optimistic about its future revenue, losses and costs.

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