'Deutsche Bank in Free Fall,' Warns Handelsblatt

February 4, 2016

The talk in Frankfurt, London, and as far away as Australia, is that Deutsche Bank is headed to be the next "big one" to fail — and that may come a lot sooner than people think. Germany's leading financial daily Handelsblatt runs the headline, "Deutsche Bank in Free Fall," writing that the bank's shares have lost one-third of their value since the beginning of the year; that this is only the beginning of February; and that the bank took a loss of EU6.8 billion for 2015. Everyone seems to know that the bank is buried under of a mountain of fines, including $2.5 billion levied by U.S. and British authorities for its part in rigging benchmark interest rates. This figure could rise to $12 billion because of other pending cases on illegal activities.

The bank's shares, trading at EU177 prior to the crisis, collapsed to EU30 by the end of 2015, and on Feb. 2, they hit an all-time low of EU15.54 euros. An article in Australia's Financial Review points out that the shares are "trading on a price-to-book valuation of 0.34 times, which implies the market thinks that almost 70% of its loans are impaired and some nasty news is just around the corner."

All this has eaten into Deutsche Bank's notoriously low capital holdings. It seems the only way it can raise capital is through issuing CoCos, or contingent convertible, bonds. The CoCos are the bail-in bonds whose payout is made only when the stock price exceeds a certain amount. More important, if the bank gets into trouble, the bonds are converted into stock; i.e., bailed in. Deutsche Bank's CoCos are being "kicked around in the gutter" and are trading at about 85 cents, and falling. Still, the bank hopes to sell EU4 billion worth, although no one is holding his breath.

Financial Review cites Paul Schulte, the Chief Executive of SGI Research, who warned that the bank is not only sitting on a mountain of bad assets dating from the previous crisis, but is holding "a large book of commodity-related derivatives that are under stress from the collapses in most commodity prices." (Oh, really! Everyone knows that Deutsche Bank has the world's largest portfolio of derivatives.)

Deutsche Bank is not alone, opines Schulte:  "This has been brewing under everyone's nose, because while people thought that the problem was periphery banks in Ireland or Spain, the actual problem is that Deutsche Bank, and the French banks with lots of toxic debt in commodities, are over-stretched; badly run; have no sense of risk management, and are organs of state capitalism."

While Deutsche Bank shares have fallen by 30%, those of Citi have sunk by 22%; Goldman Sachs -16%; JP Morgan -14%; Morgan Stanley -23%; Bank of America Merrill Lynch -22%; and Credit Suisse -22%.