And, of course, the DoJ case is not the only one in the works. All of which adds to the uncertainty surrounding the shares, especially because, while the bank has significantly improved its capital position from the depths of 2008 and continues to do so, evident in the sharp improvement made in the most recent EU Bank stress tests from its position in 2014, its metrics remain lower than many of its peers.
Under the European Banking Authority’s adverse scenario for 2018, Deutsche Bank’s Common Equity Tier One capital ratio was 7.8%, which it said was lowered by 220 basis points as a result of the fact that the 2016 stress test included for the first time a simulation of the impact of operational risks including litigation.
But, while capitalisation concerns remain, there was equally an implicit assumption on the part of many investors that, should it be required, the German government would step in. This stems partly from the fact that, at €1.8trn the bank’s asset are a significant part of the German pie and its collapse would hurt the country signficantly.
It is for this reason that the news over the weekend had such an effect; while it is arguable that many in the market still believe that the German government would step in should it need to, that belief is no longer absolute.
It also serves to move the discussion away from the health of Deutsche Bank and into the murky world of politics. It is telling that, in confirming the views of the unnamed sources, on Monday, Merkel’s spokesperson was quoted by Bloomberg saying not only that there are “no grounds” for speculation over state funding, but also that the German government expects a “fair result” from the talks with the DoJ.
While it will want to extract the maximum settlement it can, it is likely that the US will not want to risk the entire banking system in order to get it. And, increasingly, the view is that should it go, others could follow.
As James Horniman, portfolio manager at James Hambro & Partners said: “The conditions in the banking sector are much better than they were in 2008/9. Tighter regulation and stronger capital adequacy requirements have helped make banks more robust and built investor confidence – some might even say the regulations have erred too far on the tough side. Eight years ago no government could stand by and let a major bank fall – a functioning banking system is a pre-requisite for stable recovery and banks are too fundamental a part of the economic infrastructure. That’s no less true today than it was then.”
Likewise, while it is understandable that Merkel has no desire to be seen once more to be bailing out bankers so close to an election, she also does not want to be seen to have been fiddling with politics while the European banking system burned.
Very little can be done until the extent of Deutsche Bank’s litigation liabilities are resolved; much of that now lies at the feet of the DoJ. All of which leaves the whole thing very delicately balanced and investors holding their breath.
