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Deutsche Bank in Trouble: Will the German Giant, Too, Turn Belly Up?

By Damian NowiszewskiStock MarketsMar 27, 2023 09:52AM ET
www.investing.com/analysis/deutsche-bank-in-trouble-will-the-german-giant-too-turn-belly-up-200636642
Deutsche Bank in Trouble: Will the German Giant, Too, Turn Belly Up?
By Damian Nowiszewski   |  Mar 27, 2023 09:52AM ET
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  • Last week, Deutsche Bank's stock plunged, and CDS rose, causing concern among investors and depositors.
  • The long-standing structural problems at Deutsche Bank, dating back to the 2008 financial crisis, have eroded confidence in the bank.
  • While central banks may need to print money to provide liquidity and bail out struggling banks, concerns about inflation may make them think twice.

At the end of last week, we witnessed another domino fall as the banking crisis threatened the U.S. and Europe.

This time it is Deutsche Bank (ETR:DBKGn) (NYSE:DB), whose share price has recently fallen more than 10%. This was after a sharp rise in the bank's CDS (credit default swaps), which reflect the cost to its bondholders of insurance against the bank's insolvency.

There is speculation that the trigger was the announcement of an early redemption of Tier 2 bonds. Although, in theory, this is not a signal of weakness, the market interpreted it as such.

Because of the long-standing structural problems at Deutsche Bank, the market tends to jump to negative conclusions.

Deutsche Bank's CDS Valuation
Deutsche Bank's CDS Valuation

Source: Bloomberg

Deutsche Bank Has Been Under Scrutiny for a While

The structural problems of one of Germany's largest financial institutions, whose assets are valued at about $1.5 trillion, date back to the 2008 financial crisis.

The biggest problem at the time was the loss-making investment business, which was spun off and gradually phased out, in addition to various fines imposed by regulators.

The basis of the recovery plan in recent years has been to focus on traditional banking areas such as corporate and retail banking, which, according to the 2022 report, is being implemented.

The result, which can be seen as a positive sign, is a profit of more than $6.45 billion, excluding the bank's investment arm.

So What Is Wrong With the German Bank?

It comes back to the question of confidence, not only in the individual banks but also in the system as a whole.

At the moment, none of the banks in the fractional reserve system can survive a so-called run, i.e., a massive withdrawal of deposits.

Even if there is nothing fundamentally wrong with Deutsche Bank, the bank's bad reputation could become a serious problem.

Will Central Banks Have to Print Money?

Given the announcements and actions of the major central banks, especially the FED, it looks like the remedy for a potential banking crisis is once again to print money, which sounds sadly familiar.

In practice, the Fed's proposals are to provide liquidity to banks that need it, i.e., the creation of more money out of thin air and an increase in the size of bank guarantees, which is a short-term bailout but a deepening of the structural crisis.

This is because banks with a guarantor of last resort behind them, who will come to the rescue if something goes wrong, will have less incentive to manage risk effectively or improve management in general, and this creates moral hazard.

On the other hand, deposit guarantees tend to reduce pressure on banks from customers, who will focus more on the interest rates rather than the institution's financial situation.

This makes sense from the customer's point of view, as funds are legally protected. So, it looks like the central bank will have to print money once again.

Still, this time there is one key factor that may make the Federal Reserve think twice before continuing to release hundreds of billions of dollars into the market - inflation.

Last Year’s Lows in Sight

Deutsche Bank shares have been in a downtrend since the beginning of this month. The stock is now approaching 2022 lows, which lie just above the $7 mark.

Deutsche Bank Daily Chart
Deutsche Bank Daily Chart

An attack on this area is likely. If the bears break through, the March 2020 low would be the next target.

***

Disclosure: The author does not own any of the securities mentioned.

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Deutsche Bank in Trouble: Will the German Giant, Too, Turn Belly Up?
 

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Deutsche Bank in Trouble: Will the German Giant, Too, Turn Belly Up?

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Comments (20)
Rajesh Kumar
Rajesh Kumar Mar 30, 2023 12:34AM ET
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After couple of weeks, no one will care what banks are doing. Retail consumers will take loan from bank and will not make any payments. Banks will take money from the wealthy individuals and businesses and will not return the money to them. Government will pay these wealthy individuals and put taxes on people. If people don't pay taxes, then print money. Who is there to say or do anything. This society is on the verge of collapse. Hence it doesn't matter what UBS or Credit Suisse is doing. Government is only interested in continuing to support Ukraine. Somehow people are eating food and living.
gary leibowitz
gary leibowitz Mar 29, 2023 9:56PM ET
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The Pandemic was discarded just as easily until we saw with our own eyes death in USA.  I guess we never learn from the past. heck that one had charts and actual follow the dots path and yet we managed to pretend falling off a cliff the wind will hold us up. Only ONE TRILLION and counting.  But the last 40 years we relied on disinflation to prop up all assets and allow paybacks to be cheaper as rates dropped.  Too bad this TRANSITORY problem is here. No problem, the banking crisis solved that too. it ill tighten economic conditions and do what the FED couldn't with rate hikes.  no more rate hikes for it is OUT OF CONTROL at 4.5%.  Bank debacle of trillions at a fed funds rate of what?  never mind. be happy.
gary leibowitz
gary leibowitz Mar 29, 2023 9:49PM ET
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Article presents facts but no one will listen. heck I posted 2 weeks before the SVB debacle that it was inevitable, financial debacle,  based on 40 years of disinflation and the ability to use future lower rates to pay them off. Heck a trillion dollar debacle today was cheered by Wall Street 3 weeks in a row with no down side so far. Astonishing.  Like the first 5 weeks of a Pandemic with known charts and certainty how science works. We now live in the no consequence era.  In fact the debacle supposedly did what the FED tried with rate hikes, tighten lending.  Case closed. Everything we do is great so relax and be happy.  Everyone will ignore future inflation data and assume zero hike in May and reducing rates right after. See how easy that was. .
Matthew John
Matthew John Mar 29, 2023 4:23PM ET
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Trumpster Rocks
Trumpster Rocks Mar 29, 2023 1:03AM ET
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7.25
Matthew John
Matthew John Mar 29, 2023 1:03AM ET
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Ramesh Shah
Ramesh Shah Mar 28, 2023 3:34AM ET
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Sell $8 jan 2024 Puts in NY
Ken Roth
Ken Roth Mar 28, 2023 2:40AM ET
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Rediculous article trying to uphold and create fear and continued panic causing people to loose money. Reality is that the EU banks are strongly capitalized  and can withstand enormous bankrun pressure based on the financial crisis experience. DB results for Q1 2023 will be the best result since before the financial crisis so trying to short this stock will be financial suicide. Think again before publishing these old news not good journalism.
gary leibowitz
gary leibowitz Mar 28, 2023 2:40AM ET
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Not a single day did we drop more than a NORMAL day. in fact 3 weeks in a row we are UP baby. What debacle? Only One trillion. Money truly does grow on trees. Street thinks this is a positive that's why we are UP UP and away since the so called one nanosecond debacle. INSANE!
amt hun
amt hun Mar 28, 2023 2:22AM ET
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This article aged badly.
Buck Wood
Buck Wood Mar 27, 2023 11:06PM ET
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In a word.....NO!
William Chua
William Chua Mar 27, 2023 4:44PM ET
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click bait alert😑
 
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