Deutsche struggles to put out fires

When a prime minister expresses full confidence in a minister, it is usually time to start the resignation stop watch. And when German finance minister Wolfgang Schäuble said this week he had “no concerns”about Deutsche Bank, all hell broke loose in Frankfurt.

It was the second attempt within hours to calm the waves crashing over Germany’s largest bank – and the second attempt to backfire. Late on Monday evening, co-chief executive John Cryan issued a statement insisting the Frankfurt-based bank was “rock solid”. But shares started to fall on Tuesday and, after Schäuble’s voted of confidence, they kept falling.

By close of trading the bank’s value was down by half compared with six months previously – almost 40 per cent so far this year – over fears that Deutsche Bank did not have enough cash to cover risky investments. Cryan acknowledged in his Monday night statement that volatility on the stock markets was having an impact on earnings – a mild understatement after the bank posted record losses of €6.8 billion for 2015.

But investors are also worried about the road ahead and in particular that Deutsche’s dubious record in the financial crisis will soon catch up with it.

More than 6,000 different litigation cases are ongoing against the bank, meaning a large pay day is looming for investors and lawyers.

A final blow to the bank’s reputation is an ongoing damages case in a Munich court against the bank’s other co-chief executive Jürgen Fitschen and two of his predecessors, Josef Ackermann and Rolf Breuer.

With pressure turning to panic on Wednesday, Cryan acted to counter doubts about the bank’s cash pile. Soon reports emerged of plans for Deutsche to buy back its own bonds.

News of the buyback programme had two positive effects. First, it gave a psychological boost to traders that the bank had enough cash to do so.

Second, the early buyback at a lower price to maturity in six months’ time will give the Frankfurt institution a much-needed profit boost. Shares in the bank rose 17 per cent on the news on Wednesday, closing up 10 per cent.

But when the bank declined to comment directly on the buyback and with speculation of its eventual value ranging from €4 billion to €50 billion, traders were quick to notice that the promised buyback would focus on senior bonds rather than the high-interest contingent convertible (Coco) bonds.

Show of defiance

These latter bonds have been hit hardest in the recent turmoil because, in times of financial stress for a bank, they convert into equity or are completely wiped out.

In these trying times for Deutsche Bank, Germany’s business community has rallied behind its financial dray horse in an unusually nationalist show of defiance.

Martin Wansleben, head of the German chamber of industry and commerce (DIHK), said the current uncertainty was not the fault of individual institutions but had wider causes.

Other German analysts agreed, citing everything from uncertainty over China to the struggle of oil-producers to turn a profit on plunging prices. But they admitted that Deutsche Bank may be the tip of what may be a very big and very dangerous iceberg.

"Of course, we are concerned about what is happening," Wansleben told the Frankfurter Allgemeine.

Germany's small and medium-sized companies – or Mittelstand – the cornerstone of the German economy, needed strong German banks, he said, as did Europe and the wider world.

Given the uncertain global outlook and Deutsche’s legacy problem, there is a lingering feeling in Frankfurt that the bond buyback is a welcome shot in the arm for a sick bank that has been struggling for years to find a new direction and identity.

Cryan, brought in last year to replace the tainted Anshu Jain, faces pressure at home and abroad to make a clean breast of financial crisis wrongs and give the bank a clear, fresh focus.

But opinion remains divided on whether this means maintaining Deutsche’s international ambitions or going back to its roots in Frankfurt.

Investor fears

Given growing global economy uncertainty and the current glare of investor attention, this is the worst possible time to be performing corporate open-heart surgery.

But time is running out for Germany’s financial calling card in the world.

After a short rally on Wednesday, revived investor fears about the global economy had a knock-on effect on Deutsche credit default swaps (CDS) yesterday. The price of loan insurance against losses at Deutsche Bank reached its highest level in four years as the bank’s shares fell again by just over 6 per cent.

The Frankfurter Allgemeine, house journal of Germany's financial capital, noted with concern this week that Deutsche Bank was now worth less than JP Morgan's annual profit.

When it asked some of the bank’s senior managers whether they feared this would make it a prime takeover target, the gloomy response of one unnamed wealth manager was: “Who’d take us over with our residual risk?”