Australia should be worried about Deutsche Bank’s woes

The Australian 8:21am September 28, 2016

Robert Gottliebsen

While the world was captivated by the debate between Hillary Clinton and Donald Trump in New York, across the Atlantic the markets were gripped in yet another banking crisis. And this time it was the problems of the German giant Deutsche Bank that were in the spotlight. But everyone knows that if Deutsche stumbles immense pressure will be placed on the troubled Italian banks, which will then spread to global banks and bank shares. Australian will not escape the fallout.

On the surface, the issue creating the crisis is the proposal by the US Justice Department that Germany’s largest lender pay a $US14 billion legal settlement to close out mortgage-securities probes. There must have been some wry humour in the US Justice Department because the $US14bn demand is around the market capitalisation of Deutsche Bank.

But the reason the fine is so close to Deutsche Bank’s market capitalisation is that the shares have fallen more than 60 per cent since last October — a fall that reflects the deep market apprehension about the hidden problems of Deutsche Bank.

I have never forgotten talking to a former Deutsche executive in the period just after the global financial crisis. He graphically explained the deep problems of the German bank. In the years that followed, Deutsche undertook write-offs, raised capital and passed a few stress tests. But if that executive was right, then the deep problem was never fully addressed. Accordingly, the 2015-16 fall in Deutsche’s share price is a clear warning sign of deep problems.

This week, Deutsche denied the widely reported rumour that it had sought help from the German government. When asked whether the German government should support Deutsche, Angela Merkel made this rather strange comment: “Deutsche Bank is one part of the German banking and financial sector, and of course we wish all companies, even when they are experiencing temporarily difficulties, to perform well. Apart from this, I don’t want to comment.”

Not surprisingly, this triggered extensive press comments on how the German government could get around the European clamps on governments bailing out banks.

One suggestion was that Deutsche should acquire Commerzbank, of which the German government holds a 19 per cent stake. Commerzbank bank has a market capitalisation that is about half of Deutsche’s. Another suggestion was that Deutsche should sell its asset management operation. There are plenty of potential buyers.

And, of course, the bank needs to negotiate with the US to reduce the settlement amount. But even it were halved to $US7bn it would still not be that far short of half its market capitalisation.

If Deutsche goes to its shareholders it will need to confess all. And, like all European banks, negative interest rates have hit it hard.

Any capital rising by Deutsche will immediately put pressure on the other European banks. In Australia, bank shares have been weak because of limited growth and the affects of interest rate reductions.

Europe is an important source of global banking funds and Australia was a big borrower in Europe as part of the funding of the housing boom. We have an important stake in the events unfolding in Berlin.

Former UK Chancellor of the Exchequer Norman Lamont was blunt when he spoke to the Institute of Directors conference pointing out that German banks could be a danger to Europe: “The biggest threat, I think, to Europe is the banking crisis. I think Italian banks are in a very serious situation; I think German banks are probably in a very serious situation, too”, he said.