Shares of Deutsche Bank (NYSE:DB) lost a little more than 5% of their value over trading last Friday after reports that the global banking group is under “special investigation” from the German regulator BaFin.  Investor confidence was already flagging over the end of the week with the U.S. job market reporting an unemployment rate of 8.2% for June – the second consecutive month of slow employment growth after the figure touched the low of 8.1% for the first time since early 2009 this April.  And news that trouble is brewing for the largest German bank over the LIBOR manipulation scandal which has already sent Barclays (NYSE:BCS) reeling and threatens to hit other major financial groups including RBS (NYSE:RBS), JPMorgan (NYSE:JPM) and UBS (NYSE:UBS) clearly was too much for investors to stomach.
We maintain a $49 price estimate for Deutsche Bank’s stock, which is about 40% above the current market price. The negative market sentiment towards bank stocks, and European banks in particular, are largely responsible for the significantly depressed share price.
Investors have remained skeptical about bank stocks for the whole of Q2 2012 with the deteriorating debt situation in Europe leading to a lot of uncertainty over how much these shares are really worth. And to make matters worse, the LIBOR manipulation scandal that came to light last week with the unprecedented $450 million fine for Barclays over its role in artificially keeping the benchmark lending rate low, has further shaken investor confidence in the world’s largest banks.
Last week, reports revealed that nearly a dozen banks which contribute to the calculation of the LIBOR and its European counterpart the EURIBOR are under investigation by American and British regulators for allegedly fixing these rates during the economic recession of 2008. Deutsche Bank had also acknowledged that it was being investigated over this matter. The fact that the strict special investigation has been initiated against it by BaFin only made matters worse.
The impact on Deutsche Bank’s value of its involvement in the scandal can be profound, with talks about breaking up major banks found guilty already gathering wind. Such a decision imposed on the bank will clearly have a far-reaching effect on its overall business than a one-time fine which would be accounted for and absorbed over a single reporting quarter.Notes:
- Rate rigging probe escalates in UK and Germany, Reuters, Jul 6 2012 [↩]
- US Unemployment Rate Total in Labor Force Seasonally Adjusted, Bloomberg [↩]