Currency analyst

Salvation plans for Deutsche Bank

Shades lengthen over the Deutsche Bank as it struggles to settle the US Department of Justice’s probe into alleged mis-selling of mortgage securities. The fine threatens to undermine investor and client confidence in the biggest German lender. Here comes a main question how to restore the client trust and wriggle out of this difficulty.

Many analysts suggest several scenarios of what the DB should do to tackle its problems.

The optimists still hope that DB will manage to settle the case with $3bn-5bn. As it was stated earlier the Bank expected this turn of event (nobody dodges from the sword of justice) and set off some money (€5.5bn) to cover the cost of litigation. If the US Department of Justice is condescending, the Bank will be salvaged. Its share prices will regain and rise from its three-decades lows; the client confidence will be shored up, and Deutsche will save its reputation of a big lender. The crisis will be over.

In contrast, if the DoJ demands more than 5bn settlement, the DB will have to tighten its belt and consider other options to stay afloat. The first one that comes to mind is to deleverage the balance sheet by selling Postbank, but it is difficult to realize, because of a lack of buyers and poor market conditions. This situation with the DB may force large asset managers and corporate treasurers to jump from the train running to abyss. Sharp cuts of client revenue will make rating agencies to downgrade the bank (even more clients will be willing to run away, if it happens).

As all DB’s client disappear, the everybody’s eyes will go to the Angela Merkel’s government. With less than a year away from a general election and placed under fire of the decision to allow vast numbers of immigrants to flow into the country, we doubt that Ms. Merkel will come to the rescue. It could be a political suicide for chancellor herself and for her colleagues. Perhaps, the only thing the government could do in this situation it is to engineer a merger of DB with Commerzbank. Although this measure is considered to be of a last resort due to rising discontent among bank officials, it could save Deutsche Bank without recourse to the state aid.

In this article, we painted a rather gloomy picture of the DB’s present and future. But maybe it is in fact not that bad as it seems to be. A few analysts believe that all these Deutsche’s problems might be exaggerated by the banks’ №1 enemy – speculators. According to the DB’s Chief Executive Officer John Cryan, the bank’s balance sheet is healthier than at any point in the past two decades. The bank has enough liquidity to stay afloat. Moreover, even if there is a shortage of available money on hand, Deutsche can always access significant additional liquidity from the ECB. So, is investors’ rush to leave the sinking ship a bit preliminary? We will wait for more news/decisions on this matter to come up with a clear answer to this question. 

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