Once seen as the pinnacle of German banking, Deutsche Bank’s recent slump hit another low last week when the share price dropped to an all-time low of 11.44 euros. It’s the latest in a string of disappointing results and questionable decisions for the bank, which has led to speculation about its long-term future and its effect on the global economy. Many worry Deutsche Bank is on the verge of a massive collapse.
Deutsche Bank was once at the top of international lending, the pride of Germany in the international space that earned a 25% return on capital. The bank has total assets of more than 1.6 trillion euros and more than 100,000 employees around the globe. Deutsche Bank shares reached amazing highs of more than 100 euros in May 2007. But that was before the sub-prime crisis hit the industry hard and the bank took a major hit. The July 7 closing price marks a 49% drop in the stock’s value since the start of 2016, making it the worst performing stock in the blue-chip DAX 30 index. To make matters worse for shareholders, the bank has waived the dividend payment for 2016 and 2017, something it didn’t even have to do during the worst moments of the financial crisis. Times are definitely tough for Deutsche Bank; its chief economist is now calling for a bank bailout of 150 billion euro for the good of the European banking sector.
Reasons for the Decline
International banking is a volatile industry, shown by the industry as a whole suffering with the uncertainty surrounding the effect of the Brexit decision and perpetual weakness in Italian banking, which is trickling through other European organizations. The past decade has been rocky for the sector as a whole with an environment of low interest rates and increasingly rigorous banking regulation.
Deutsche Bank isn’t alone in its recent struggles surrounding these events, but what alarms investors and analysts more is the idea that the bank may be past its prime and have a struggling foundation. To fan the fire, the International Monetary Fund recently described Deutsche Bank as “a major source of systemic risk in the global financial system.” In the U.S., Deutsche’s American division failed its annual stress test two years in a row, according to the U.S. Federal Reserve. Deutsche Bank has been rocked by global scandals and challenges lately, including involvement in a staggering 8,000 litigation cases across the globe. It has also amassed hefty fines over the last few years, including a $2.5 billion fine in 2015 for rigging interest rates and breaking U.S. sanctions against countries like Cuba, Iran, and Myanmar. Indeed, much of Deutsche Bank’s decline could be viewed as an internal implosion—while it was losing seven billion euros last week, its closest rival profited one billion euros, showing that the decline can’t solely be blamed on external industry struggles.
Within the organization, things aren’t any rosier. Employees are quitting in droves, including upper management members, and less than half of all workers say they are proud to be employed by Deutsche Bank.
According to an anonymous Deutsche employee, “There are very real concerns on the financial markets about the bank. It’s got a lot of problems. And it’s also got huge exposures on the derivatives markets. Many people are concerned it could turn into a new Lehman.”
Many outside pundits claim the bank doesn’t have a plan to turn the ship around, but internal leaders disagree. Deutsche Bank turned to a new CEO last year, John Cryan, who has made promises to dramatically cut costs, boost profitability, and focus on digital banking, which will be done in part by closing 188 branches in Germany and cutting 3,000 jobs.
Investors are staying wary of the stock, employees are leaving in masses, and customers are unsure their money is safe. Time will tell if and when Deutsche Bank is able to recover from its internal and external challenges. The eyes of the global economy are on a formerly prestigious bank to set the stage for the rest of the sector.
What do you think the future holds for Deutsche Bank?