It is a striking paradox that postwar Germany has achieved sustained success as an economy, even with a flailing banking sector, headed by the flag-carrying Deutsche Bank, to underpin it. But there are signs the contradiction may be resolving.
Over the past three years, Deutsche has beaten its European rivals in share price terms — sketchy evidence, perhaps, especially as that share price has actually fallen and Deutsche has paid next to no dividends. But it is a notable outperformance nonetheless.
Not so long ago, this was the "sick bank of Europe" — it was racked by scandal, trading losses and management infighting that at times looked existential. Now, with an accident-prone Credit Suisse having taken on that mantle, Deutsche has emerged as the surprise best of a bad bunch.
The relative recovery of Germany's biggest bank has been particularly strong over the past year: the share price has doubled, albeit to a still low level. (Even now, the bank's stock is worth barely a third of the book value of its assets, compared with a price-to-book ratio for US rival JPMorgan of 1.9 times.) For chief executive Christian Sewing, who last week celebrated three years in charge, it is a vindication of sorts.
Almost more important than the stock price recovery, both in terms of stability and the resultant financial benefits, is the sharp decline in the cost of insuring against a default in Deutsche Bank bonds. Deutsche's credit default swap spreads are now narrower than those for some big US banks, thanks partly to a technical change in German bond rules, but also an easing of market nervousness around Deutsche. Talk of a rescue merger or a government bailout, frequently heard a couple of years ago, has all but evaporated.
Sewing can also point to more fundamental improvements. Unwanted assets have been shed and jobs cut, as pledged in a July 2019 strategy review. Progress has been choppy — so far only a third of the promised 18,000 jobs have gone; and its non-core division, or "capital release unit", has barely released any net capital, despite cutting an initial €72 billion ($122.1b) risk-weighted asset portfolio to €34b by the end of last year.
At the same time, Deutsche appears to have done a better job than rivals, notably Credit Suisse, in dodging bullets. It lent large sums to the now defunct Wirecard and the recently blown-up Archegos family office, but by hedging and offloading exposures it minimised losses and burnished its reputation in credit risk management.
Scandals still persist. In Spain, Deutsche has been accused of mis-selling complex currency derivatives to unsophisticated small businesses. Insiders admit the bank's record in operational risk management must be improved. Over the past six years it has been the subject of more than US$10b ($14.2b) of penalties and settlements related to historic accusations of money laundering, sanctions breaches, market manipulation and toxic asset sales.
Large chunks of the core business, though, are faring better than many expected. The bank is now seeking to rebrand itself as a "financing powerhouse", playing on its traditional strength as a fixed-income house, with a big corporate lending franchise.
In some ways, that is evidenced in better performance at the investment bank. The bulk of Deutsche's below-par equities unit has been offloaded to BNP Paribas, eliminating a slug of losses. And the boom in debt issuance by governments and companies has boosted revenue.
One unwelcome side-effect, given the undermining impact of negative interest rates in other parts of the business, is that investment banking now looks more important than ever for Deutsche. (Sewing had wanted to de-emphasise it, given concerns about the inherent volatility of trading income.) In 2020, the investment bank accounted for €3.2b of pre-tax profits compared with a group total of €1b after losses elsewhere in the group.
For all the progress, and the tougher travails of European rivals, Deutsche's shares remain slightly below where they were when Sewing took the reins three years ago. Many big shareholders will still be nursing losses.
But the investor mood is shifting. Aggressive private equity firm Cerberus, a top-five shareholder, has been less critical and Matt Zames, who had taken a personal interest in the Deutsche turnround, left his job as president of Cerberus last month. And last year, Capital Group, a more mainstream value investor, took a stake of more than 3 per cent.
After a decade as a distressed asset play, mainstream is big progress for Deutsche Bank.
Written by: Patrick Jenkins
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