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Forgot the district of the Deutsche Bank



The sun goes down in the second quarter and not a moment too early for Deutsche Bank AG. In 90 days, the German lender has replaced his CEO, promised thousands of job cuts, downgraded his credit rating and watched his stock price at new depths. Faking the Federal Reserve's stress tests was a final humiliation, albeit an expected humiliation.

None of this is good news for the lender's underlying business, which has been unprofitable for three years. Estimates for sales and earnings have fallen since the end of March, not just because of the lender's specific problems. Trying to set a balance sheet of $ 1.8 trillion is severe enough, with no interest rates in the eurozone remaining low until 201

9, stock market volatility low and tariffs impacting on economic growth.

One quarter can change a lot [19659004] Analysts' estimates for earnings per share for 2018 have dropped more than 50 percent

Source: Bloomberg


Investors seem to be ready to test the proposal that all these problems are now priced in. The shares of Deutsche Bank increased by up to 4 percent on Friday. That seems to be courageous.

Dead Cat Bounce?

Friday's jump in share price barely achieves a long-term picture


Much more could go wrong if performance continues to decline and management seeks to cut through. Last but not least, there is the risk of further credit rating downgrades. The costs of insuring Deutsche Bank's debts against the default risk have risen to a level that has not been seen since the end of 2016. At the time, counterparties and clients thought twice about their involvement with the lender. This unrest could easily recur.

Deja Vu

The cost of hedging against a debt default by Deutsche Bank is rising

Source: Bloomberg


We know that Deutsche Bank has plenty of opportunities to make the turnaround, but none of them is free. On the sidelines, hoping that it will get better over time, we risk repeating previous mistakes. Conversely, too radical an overhaul of the investment bank would weigh on returns and hence on profits, leading to a vicious cycle.

But the current tide of bad news and the risk of losing the confidence of stakeholders and counterparties should (19659002) An encouraging scenario recently created by UBS analysts is that Deutsche Bank halves the size of its investment bank, the turnover of 27 billion euros to around 22 billion euros and can reach a fair value of 21 euros per share – more than twice the current market price of 9 euros. In order to achieve this, UBS makes some assumptions – for example, that the costs will decrease with the revenues. Nevertheless, it at least suggests that more can be done.

Deutsche Bank has lost market share and risks losing more. The restructuring commitments have fallen. Commitments to reverse Wall Street in favor of its home market have been curbed by assurances that they will remain committed to the US market. There is no silver bullet, but it would certainly be worth it to shoot something up soon – instead of the market forcing the bank's hand.

This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent at llaurent2@bloomberg.net

Contact the publisher of this story:
Edward Evans at eevans3 @ bloomberg.net


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