May 2016: Will Deutsche Bank Survive This Wave Of Trouble Or Will It Be The Next Lehman Brothers?

If you have been waiting for "the next Lehman Brothers moment" which will cause the global financial system to descend into a state of mass panic, you might want to keep a close eye on German banking giant Deutsche Bank (NYSE:DB). It is approximately three times larger than Lehman Brothers was, and if the most important bank in the strongest economy in Europe were to implode, it would instantly send shockwaves rippling across the entire planet. Those that follow my work regularly know that I started sounding the alarm about Deutsche Bank beginning last September. Since that time, the bad news from Deutsche Bank has not stopped pouring in. They announced a loss of 6.8 billion euros for 2015, Moody's just downgraded their debt to two levels above junk status and they have been plagued by scandal after scandal. In recent months they have gotten into trouble for trying to rig precious metal prices, for committing "equity trading fraud" and for their dealings in mortgage-backed securities. The following comes from Zero Hedge…

A month after admitting to rigging precious metals markets, Deutsche Bank has been hit with a double-whammy of more alleged fraudulent behavior today and the stock is sliding. First, Reuters reports that the bank took a charge of 450 million euros for "equity trading fraud," and then Bloomberg reports that The SEC is looking into Deutsche's post-crisis mortgage positions.

This is a bank that is steadily bleeding money, and so the last thing that it needs is for government agencies to be putting immense pressure on it. Unfortunately for Deutsche Bank, the SEC seems determined to kick it while it is down…

Troubled Wall Street giant Deutsche Bank is under another investigation, this time by the Securities and Exchange Commission regarding the pricing and reporting of certain mortgage-backed securities.
The SEC wants to know whether the Frankfurt, Germany-based bank artificially raised the value of mortgage-backed securities in 2013 and later hid those losses for an extended period of time, Bloomberg first reported, citing people familiar with the matter.

But even if there were no scandals and no government investigations, the truth is that Deutsche Bank would be a deeply troubled bank anyway.

At one point, it was estimated that Deutsche Bank had 64 trillion dollars worth of exposure to derivatives contracts. That is an amount of money that is approximately 16 times the size of the GDP of the entire nation of Germany.

So nobody wants to see Deutsche Bank fail. It would be a financial disaster unlike anything the world has ever experienced before.

But right now things are not looking good. As you can see from this chart, the steady decline of Deutsche Bank's stock price is eerily similar to what happened to Lehman Brothers during the months leading up to the time when it finally completely collapsed…

Earlier this year, Deutsche Bank's stock price set a new record low, and since that time it has been hovering just above that record low.

Clearly it is no secret that Deutsche Bank is having big problems, and the outlook for the immediate future is not good. I included the following quote from Berenberg analyst James Chappell in a previous article, but I think that it bears repeating…

Too many problems still: The biggest problem is that DBK has too much leverage. On our measures, we believe DBK is still over 40x levered. DBK can either reduce assets or increase capital to rectify this. On the first path, the markets do not exist in the size nor pricing to enable it to follow this route. Going down the second path also seems impossible at the moment, as the profitability of the core business is under pressure. Seeking outside capital is also likely to be difficult as management would likely find it hard to offer any type of return on new capital invested.

In the end, I believe that Deutsche Bank will ultimately implode, but it won't be the only one.

Meanwhile, we just got some more very disturbing news out of Asia. According to Bloomberg, Japanese exports have now fallen for seven months in a row…

Japan's exports fell for a seventh consecutive month in April as the yen strengthened, underscoring the growing challenges to Prime Minister Shinzo Abe's efforts to revive economic growth.
Overseas shipments declined 10.1 percent in April from a year earlier, the Ministry of Finance said on Monday. The median estimate of economists surveyed by Bloomberg was for a 9.9 percent drop. Imports fell 23.3 percent, leaving a trade surplus of 823.5 billion yen ($7.5 billion), the highest since March 2010.

When your imports are 23 percent lower than they were a year earlier, that is a clear sign that consumer demand is way, way down and that your economy is in the process of imploding.

So I will repeat what I have said a number of times before…

Watch Germany and watch Japan.

I believe that they are going to be two of the biggest stories as this new global financial crisis begins to play out.

Comments

[Atlas44]

The news flow on DB is absolutely putrid and yet the chart has shown a bit of strength. One of these days the news flow will be better, earnings will be better, restructuring will have taken place, the divvy will be reinstated, the fines will be history and DB will be much higher. I admittedly have invested mainly in US based banks, but when a reputable CEO says they will be around break-even for the year and it's selling for a small fraction of tangible book, it makes sense to pay attention.

[xxypa]

True.. German utilities are a steal not sure when the political parties realize that renewables alone cannot solve energy demand in the long term ..

[solucky]

" DB will recover and a panic short squeeze "

Dont expect it so soon, at the moment i build up a position and try to trade a bit to increase my position. DB is most likely to big to fail and Germany still have a few options...

Also for german utilities i am contrarian, the cost for the closed nuke plants and the switch to renewables hurt them alot but over a longer timeframe they are cheap in my opinion.

[xxypa]

Best time then to go contrarian and as we all know DB will recover and a panic short squeeze
Will bring it back to the 40 to 50 $ level. No joke that actually happened in 2008!

[jazz1611r]

If you follow the ZeroHedge site, you should know the commentaries are always negative, sensational and pessimistic. It is load of garbage not worth wasting time on.

[Suzanne McCormick]

Deutsche Bank's (DB) motto is "A Passion to Perform," the question is what? More criminal acts, it would seems so based on the evidence! Is there a Market that they didn't "Rig/Fix?" The Litany of criminal acts (and there are not alone) and the Tsunami of litigation coming will bleed them badly and the Shareholder take in the pocket book! As a Shareholder, Widow and Legal Executrix of my husband's sizable Estate, I know how duplicitous and unethical DB and their predatory lawyers (White & Case and Pillsbury Winthrop) are! See "mccormick estate fraud" or "stop estate fraud" for some of the details! The Pandora's Box of LIBOR has just been opened by a Federal Judges in NY! DB now has to secure at least two (2) EXEMPTIONS from the US Labor Dept. to continue to manage ERISA Pension Funds, since DB is in the criminal soup! And what about all those "Trillions" in Derivatives, how are they going to go away? I too have read the tea leave of DB and in my opinion DB will have to obtain a bailout from from the German Government prior to the next Annual Meeting - That's right sports fans!

[Blizz_The_Wiz]

Senrab, I think the market acknowledges that DB's derivative book is largely or almost entirely hedged, however the elevated uncertainty with the make-up of this structure and whether it has liquidity to actually pay out in the event of a market shock - is why it's trading at s very steep (and well deserved, I think) discount.
Remember during the financial crisis when the same folks said "banks have AAA rated mortgage backed securities that are fully insured."
The insurance simply didn't pay-out due to a massive liquidity shortage. Even the credit default swaps purchased by many hedge funds didn't payout as expected to hedge their CDO purchases.
During times of elevated volatility, the last think you want is an extremely highly leveraged book of illiquid instruments, no matter whether the net position "on paper" is "market neutral".....
I believe this is how the author is making the comparison.

[senrab]

Firstly, Deutsche Bank has little to do with Germany, the German retail part is totally irrelevant. Secondly, the lev issue really feeds into profitability, DB is really a huge repo bank, when I was there I would say 50% of the balance sheet is deployed into hedged repo structures (a large part of the rest is also repo-est structures). Reduce that activity then revenue dries up. I actually think the tangible assets number is credible and therefore the book value (ignoring other factors) is a reason to buy. DB doesn't take much credit risk, doesn't have much exposure to EM nor has trading var anywhere near say a GS. The question is really whether they can get costs down and whether the legal costs and fines ease up. The derivative stat, whilst entertaining, is of course nonsense...If I buy 10 then sell 10 and repeat 100 times, what is my position?

[Danese]

Still, according to my information DB is the largest bank in Germany, both retail and commercial, so it has a little more that a little to do with Germany indeed. Apart from that, probably the risks derives mainly from the trading and investment activities, 1. or 2. largest currency trader in the world. The loan book in Germany must be fantastic, how can anyone loose money in such a sound economy, with real estate prices coming up, but never a bubble as we might see in Paris og London, even Berlin is dirt cheap compared to Copenhagen where I live, I bought real estate companies af Deutsche Wohnen, Vonovia, TLG Immobilen and others for same reason, best, Mikael

[solucky]

" even Berlin is dirt cheap compared to Copenhagen where I live "

Dont forget low wages = low prices

Germany have the trend of working poor, the increasing real estate prices are mostly from investors outside of Germany.

Its not unusual that you even as an engineer with university degree earn under 2500 EUR after taxes

[Danese]

amazing, even a postman in Denmark will plus 30-40 percent more...thanks for the information. Hopefully G will raise minimum vages, would be good for europe too, as G almost is too competitive right now...the raise internal demand would be beneficial

[Danese]

Deutsche bank is rock solid, the loss last year mainly is write down of goodwill. Also 1. quarter this year profitable, modest but still. The only reason for lack of important earnings is fines, mainly from the us, of aprox 12 billion dollar since 2012. To pay able to pay this extortion money - and still be very well capitalized with 11,2 tier one ratio - and funds 4 times more than needed to pay debt. Not at bad achievement at all. When the witch hunt on banks ends, Deutsche will trade close to book value, 3 x todays price. It will take 3 years, if the US stop taking out the competition in an attempt to try to let the germans (VW) and french with BNP) pay for the countrys deficit. I think it should be noticed that DB opposed to all major US banks came through the 2008-crisis without taking one dollar or euro from the state. Today the capital lewel is more that the double. And we have no US inflicted crisis! One thing is looking at numbers, another is the quality of the assets below. The german economy is after Switzerland the strongest in the world because everyone desperate wants a Porsche, a Mercedes, a BMW. Where US has deficit, Germany har humongous surplus. I would rather own Deutsche than Bank of America, although this of course is rock solid also. So lets relax and forget the fear mongers. Best greetings from Copenhagen

[xxypa]

The Lehman example is not the right analogy for DB. The financial fundamentals are different . Moody's downgrade was already priced in hence the stock bounce. All further litigation are also priced in so is a small loss which may not actually occur . Looks like the stock will go up from here.

[rasputin2000]

this investigating involving miss markers securities happens all the time and wouldn't 'take down' a bank...irresponsible journalism

[Lincolntrue]

It's not just the fines, the bank itself is not doing well financially. Salt on the wounds if you will.

[rasputin2000]

this investigating involving miss markers securities happens all the time and wouldn't 'take down' a bank...irresponsible journalism

[gramondo37]

Yes, there are difficult times ahead.......

[xenoch]

I've been watching DB and CS to see if I can find a buying opportunity when they bottom out, but I believe both could be a year or more away from their true bottom. There is a good chance they get bailed out somehow, so I have a hard time imagining a total implosion. This situation should get worse before it gets better, though, and I don't think it's wise to invest in banks right now even with rates going up soon. These financials are held together in funds and even the ones with little exposure to headwinds will still see their stock prices go down.