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Deutsche Bank’s room to forget



The sun is setting in the second quarter, and it's not too early for Deutsche Bank AG. In 90 days, the German lender has replaced its CEO, promised thousands of job cuts, seen its credit rating lowered, and has seen the price of its shares reach new depths. The suspension of the resistance tests of the Federal Reserve of the United States was a final humiliation, although expected.

None of this is good news for the lender's underlying business, which has not been profitable for three years in a row. Estimates of income and earnings have worsened since the end of March and not only because of the lender's specific problems. Trying to fix a balance of $ 1.8 trillion is quite difficult without interest rates in the euro zone that will remain low until 2019, limited volatility of the stock market and trade tariffs that weigh on economic growth.

One quarter can change a lot [19659004] 2018 earnings per share The forecasts of consensus analysts have fallen more than 50 percent

Source: Bloomberg


Investors seem willing to try the proposition that all these problems They have a current price. Deutsche Bank shares bounced up to 4 percent on Friday. That seems daring.

Dead Cat Bounce?

Friday's jump in the stock price barely registered in the long-term image


Much more could go wrong if the performance continues to decline and the administration tries to break through. No less important, there is the risk of new credit rating downgrades. The cost to ensure that Deutsche Bank's debt against default risk has reached levels not seen since the end of 2016. Back then, counterparts and clients thought twice about their exposure to the lender. Those nerves could easily return.

Deja Vu

The cost of insuring against Deutsche Bank's debt default is increasing

Source: Bloomberg


We know that Deutsche Bank has many options to try to change things, but none of them It's free. Playing on the margins with the hope that things will improve over time runs the risk of repeating previous mistakes. On the contrary, a too radical revision of the investment bank would harm the income and, by extension, the benefits, which would cause a vicious circle.

But the current of bad news and the risks of losing the trust of the interested parties and the counterparts should trigger a more concerted management action.

A recent encouraging scenario, developed by UBS analysts, is that Deutsche Bank could halve the size of its investment bank, reduce revenues to some 22,000 million euros from 27,000 million euros and reach a value reasonable of 21 euros per share, more than double the current market price of 9 euros. To get there, UBS makes some fair assumptions, such as that costs will decrease with revenue. However, at least it suggests that more can be done.

Deutsche Bank has lost market share and risks losing more. His promises of restructuring have plummeted. The promises to cut Wall Street in favor of its domestic market have been moderated with guarantees that it will remain committed to the US market. UU There is not a silver bullet, but it would surely be worth throwing something into the air soon, instead of letting the market force the bank's hand.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans en eevans3 @ bloomberg.net

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