Why Deutsche Bank Is Trading At All-Time Lows

September 30th, 2016 by Trefis Team
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DB: Deutsche Bank logo
DB
Deutsche Bank

Deutsche Bank (NYSE:DB) saw its share price fall to an all-time low of below $12 earlier this week – a 50% reduction in value since the beginning of the year. Plagued by poor operating performances in recent quarters, the German banking giant has been under considerable pressure from investors and regulators for lagging its peers in terms of meeting regulatory capital requirements. However, the most recent sell-off in the bank’s shares was triggered by news that the U.S. Department of Justice is seeking $14 billion in fines related to the German bank’s misrepresentations of mortgage-backed securities (MBS) prior to the economic downturn. Deutsche Bank released a statement claiming that it has “no intent to settle these potential civil claims anywhere near the number cited,” but the possibility of a larger-than-expected fine amount clearly spooked investors. [1]

The reason for this is captured in the table below, which shows how Deutsche Bank’s key capital ratio metric – the common equity tier 1 (CET1) capital ratio – will be affected if the bank incurs a fine of $14 billion (the worst-case scenario), and also if the fine is a more plausible $6 billion.

DB_QA_FineCET1

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As detailed above, a fine of $14 billion would actually result in Deutsche Bank’s CET1 capital ratio falling below the regulatory minimum as mandated by the ECB. Even if the final settlement amount is $6 billion (which is very possible), the bank would have exhausted all of its provisions for regulatory enforcement (€4.05 billion). With the bank also facing investigations related to manipulation of forex and benchmark interest rates – which could also result in multi-billion dollar settlements in the near future – Deutsche Bank will be forced to either raise additional equity capital under extremely weak market conditions, or request the German government for a bailout to maintain its CET1 ratio around current levels. With neither of these prospects being good for existing shareholders, the bank’s shares have taken a beating over recent weeks.

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Notes:
  1. Deutsche Bank confirms negotiations with DoJ regarding RMBS, Deutsche Bank Press Releases, Sep 16 2016 [↩]