WAS THE ONE-NOTCH downgrade by Moody’s of Deutsche Bank’s ratings on May 23, reflecting concern around the increased execution challenges the bank faces in achieving its strategic aim, a further signal that John Cryan’s plans to rehabilitate the bank are doomed?
That’s certainly the view of a lot of people out there. Of the institutions generally referenced in any conversation about potential losers among major banks at-risk – restricted these days to Barclays, Credit Suisse and Deutsche Bank (sorry Bill but no-one really cares about StanChart) – it’s Deutsche that comes out worst. Although only slightly behind CS and the wonky Thiam factor. Barclays does seem to be moving ahead in the chance-of-success stakes even though the risk factor remains elevated around all three.
Barclays has moved aggressively to trim its balance sheet and ditch risk-weighted assets, pushing hard to roll off non-core positions and sell non-core businesses. It appears to be more advanced in its capital balancing plan; and is now moving hard on costs. Its broad transatlantic corridor strategy, which captures a big chunk of global IB wallet, is if nothing else transparent. The bank says it has worked hard to right-size and optimise its client portfolio, having had a lot of those tough conversations.
The business-line diversification across retail and consumer, cards, and a slightly tamed corporate and investment bank is a plus. In response to a pointed question I posed this past week about why investors aren’t buying the story, a senior executive at the bank tried to convince me investors would eventually do so and the stock would drift back towards book value. (I guess he would say that, wouldn’t he?)
As for Credit Suisse, it’s certainly not ideal that the chief executive officer is viewed slightly askance by many people who are scratching their heads to understand what on earth is going on and whether the new boss is out of his depth and, well, clueless. CS is not a happy place, either in the embattled investment bank or in wealth management/private banking.
But like Barclays, at the very least the macro strategy is clear. Thiam’s Asia obsession notwithstanding, wealth management and private banking sit at the centre and the “trimmed-down-and-only-going-in-one-direction” boutique-y investment bank plays second fiddle as a support act.
AT DEUTSCHE BANK (where incidentally we’re told co-CEO as-was Juergen Fitschen will continue with the bank in a client role, confirming that CEOs never retire they just get eternally recycled), it’s a tough slog.
Moody’s chopped Deutsche Bank’s senior unsecured debt rating to Baa2 and its long-term deposit rating to A3. Cryan reacted with irritation to the downgrades, reported from the sidelines of the IIF conference in Madrid as having said that Deutsche Bank had never had more capital and could repay its debt four times over.
Analysts, on the contrary, are insistent the bank is capital-light. Even with retained earnings providing (limited) cover to the thin leverage ratio and even assuming the bank could eventually shrink the gap with some AT1, analysts still point to a multi-billion euro shortfall to get its leverage ratio up to the targeted 4.5%, while they reckon the bank’s super-thin (25bp) buffer above SREP requirements leaves very little wiggle room.
As for that AT1 gap, it’s unlikely that will be filled in the immediate term. Bearing in mind Deutsche had to pay an eye-watering 400bp over mid-swaps on its recent euro Tier 2 outing (60bp wide of Commerzbank to boot) and repriced its dollar senior curve by paying chunky premiums on its most recent US$3.6bn trade, the stepping-stone capital and funding strategy, while optically sensible, probably won’t stretch to AT1 for now and that goal remains elusive.
On the conduct front, the song remains the same. The SEC is looking now to see whether DB traders inflated the prices of US agency pass-throughs back in 2013; the bank is caught up in the US appeals court decision to overturn the district court’s dismissal of the antitrust lawsuit related to Libor manipulation; while Reuters reported on May 23 that the bank took a charge of around €450m in 2015 in relation to share trading fraud, without giving further details.
The progress Cryan is making around the balance sheet in a viciously illiquid market is open to little interpretation; it’s generally seen as going backwards. DB is more leveraged than its peers (40x leveraged on Berenberg numbers); it still has a huge derivatives portfolio; continues to struggle with the legacy of a convoluted FICC systems and IT set-up; and FICC support staff continue to be of battalion proportions.
But even leaving all of these issues aside, it’s still unclear (to me at any rate) what Deutsche Bank wants to be and what it’ll end up looking like at the end of the current restructuring programme that’ll see Postbank carved out.
Let’s run through the business-line options: Deutsche Bank has an investment bank; it has … oh actually that’s it. It’s an investment bank in the middle of an identity crisis and one that’s far from being anything like the Goldman Sachs of Europe it once claimed it wanted to be. The shares are trading at a 67% discount to book value.
Will that stock ever stare book value in the face? Answers on a postcard.
