Deutsche Bank is in the news for all the wrong reasons. Some speculators believe that it will be the 2008 Lehman Brothers collapse all over again. Shares in the bank were briefly driven down to single digits. They seem to have stabilised around €10 but this remains well below the €30 just over a year ago and €100 a share in 2007. And the bank’s future is uncertain.
Clearly investors are worried and there is an absence of people who believe even €10 would be a sensible investment. At €10 per share, an investor has a right to €48 of equity. But the problem is whether that €10 will ever be returned to you – let alone with gains. Like many other banks though, Deutsche Bank faces a number of headwinds, which have knocked its profits in recent years.
Three structural issues
New regulation since the financial crisis requires that banks must accumulate their profits to create a greater cushion against the risks that became apparent in 2008. This means that the profits that Deutsche will earn over the next few years will be used to increase the size of that cushion rather than being returned to shareholders. Relief is unlikely, as the IMF has identified Deutsche as “the most important net contributor to systemic risks in the global financial system”.
Large well-established banks have a second problem. They have become fat with too many employees juggling outdated, disparate and often dysfunctional IT systems. Deutsche has more than 100,000 employees. Its retail branches – a number of which have been cut this year – are labour intensive and add to these problems.
Dealing with this problem requires reinvesting some of its profits in restructuring its activities – which again means less money for shareholders in the short-run. Failure to do so, however, will create opportunities for new entrants to the banking market such as alternative finance and new fintech operations.
The European Central Bank’s negative interest rate policy is compounding problems. Historically, banks benefited from retail depositor inertia – depositors that park their money in accounts and don’t act upon earning little or no interest. A healthy deposit base ensured a source of zero or low-cost funds that could be lent elsewhere. But the benefit of depositor inertia disappears when interest rates go negative as it costs money to service these customers with extensive retail networks. Imposing user fees is unpopular with customers.