JPMorgan's guide to what may be wrong at Deutsche Bank now
What's the problem at Deutsche Bank today? Amidst a widespread rout in bank stocks, Deutsche Bank shares are down around 12%, three percentage points more than rivals. Its CDS have shot above 200 basis points, their highest level since the bank's travails in 2019.
What's the problem now? Deutsche Bank has spent the last three years restructuring and selling down the toxic assets in its capital release unit. At the time of the bank's first quarter results, CEO Christian Sewing said DB was in good shape and well-placed to make strategic hires having already been through a restructuring. That's starting to look a little optimistic.
Deutsche Bank's problem is partly its large exposure to the corporate lending sector, which is being roiled both by the collapse of SVB and ongoing rate rises. However, in a note this week JPMorgan's banking analysts also observed some other issues with the bank. - As wholesale funding costs rise, Deutsche Bank is more exposed than its European rivals. "We estimate that a 3% increase in the wholesale funding costs translates into an average -2%/-1% negative impact on PBT in 2024/25E," say the analysts led by Kian Abouhossein. "Within the sector, our sensitivity shows DBK, SG, Barclays and Santander as relatively more exposed to higher wholesale funding costs."
As rates rise, the implication is that Deutsche may need to cut more costs if it wants to meet its aim of generating returns above 10% and distribute €8bn of capital to shareholders before 2025. Even with last year's booming trading revenues, Deutsche's return on equity in 2022 was 9.4% before tax and 8.4% after, which is cutting things fine given the cost of capital is around 9% and rising.
This is not a banking crisis and at 200bps, Deutsche's CDS are far below the 1000bps level pushed by Credit Suisse last week. It is, however, a reminder that rising rates have real implications for banks and that the best intentions for profits and growth targets can come unstuck, and appear to be doing so.
European and UK banks pic.twitter.com/t8g403NC6P— Michael Hewson 🇬🇧 (@mhewson_CMC) March 24, 2023
Good Morning from #Germany, where banks are among the big losers in Europe. Since the outbreak of the banking crisis in early March, both Commerzbank and Deutsche Bank have lost more than average w/ -21% and -19.8%. pic.twitter.com/wxLH0usuoN— Holger Zschaepitz (@Schuldensuehner) March 24, 2023
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