Deutsche Bank and the current scenario of the financial sector

 

Deutsche Bank AG

Founded in 1870 and listed dually in the New York Stock Exchange and the Frankfurt Stock Exchange,  Deutsche Bank AG is a German financial services and investment bank, headquartered in Frankfurt and having operations in 58 countries. It’s considered the most significant German banking institution and since 2011, designated as a global systemically important bank (G-SIFI). They are banks or financial institutions of high importance, whose failure would entail crisis in the global economy. Deutsche Bank AG is also a signatory of the Principles of Responsible Banking, which are a set of guidelines aligned with the UN SDGs and the Paris Climate Agreement. Drafted by UN officials and executives of 30 banks, these principles, which include the Net-Zero Banking Alliance, are aimed at overcoming the climate crisis mainly by shifting focus to clean sources of energy (Griffiths, P.D.R. and Griffiths, P.D.R., 2021).

 

Covid-19 

The Covid-19 pandemic not only exposed the fragility of healthcare systems but also brought on an economic slump, upheaval of financial markets and disruption of commodity supply chains, globally. Germany faced a recession, with a 5% fall in GDP, and Europe as a whole saw a 6.1% fall. By providing liquidity to businesses, increasing the period of unemployment benefits and ramping up spending on healthcare, green investment and digital infrastructure, they provided one of the most generous fiscal packages among advanced economies.

Challenges in the financial sector

(Source: Italy 24 Press News)

With record high inflation of 10.3 %, there’s an onset of a cost of living crisis. Russia occupied a key role in energy supply to Europe and in particular to Germany as over 50 % of hard coal and natural gas imports were from there. The rise in energy prices brought on by the ongoing Russia-Ukraine War has thus had a major impact on the inflation rate. The European Central bank hiked interest rates to 3% as a measure to counteract the rate of inflation by making loans cost more.

Despite having no direct exposure to Silicon Valley Bank (Huet, 2023), which collapsed on March 10^th after a bank run, the banking shares European index fell by 7% (Jones, 2023) and caused the subsequent failure of crypto-friendly Signature Bank due to the contagion effect, which although unlikely to spread to Europe, is closely being monitored by the ECB (Huet, 2023).

Credit Suisse’s takeover by their long time rival UBS Group further sent shockwaves around the financial world, mainly due to customer panic to prevent a default, which made Swiss regulators harbour the deal to prevent it’s insolvency and prevent further damage to their financial markets (McCabe and Mitchell, 2023)

 

What this means for Deutsche bank

 

(Source: Yahoo Finance)

After a tumultuous two weeks, customer morale shaken, there was been widespread speculation that Deutsche Bank is next. Thus, despite maintaining robust solvency and capital positions and several quarters of profit, their shares faced a steep fall of almost 15%, it’s lowest in three years. This led to the demand of their credit default swaps, which acts as an insurance to bond holders shot up by almost double (Cooper, 2023). Going through several restructurings and management changes in the recent years did put it in bad light, but this multibillion euro change was aimed and increasing efficiency and profitability, as they recorded and 159% increase in net annual income in 2022 and it’s CET1, which measures solvency didn’t show any concern over it’s liquidity or solvency. German regulators aren’t very concerned and are assuring the public that it will not follow in Credit Suisse’s footsteps (Smith, 2023), perhaps causing it's shares to slowly rebound.

References

Bundesbank (no date) “German economy hit hard by coronavirus pandemic in 2020.” Available at: https://www.bundesbank.de/en/tasks/topics/german-economy-hit-hard-by-coronavirus-pandemic-in-2020-832418 (Accessed: March 19, 2023).

IMF (2021) “Germany’s Post-COVID-19 Recovery in Five Charts,” 15 January. Available at: https://www.imf.org/en/News/Articles/2021/01/15/na011921-germanys-post-covid19-recovery-in-five-charts.

Research, D.B. (2023) “German energy supply: Oil, coal and renewables are gaining in importance,” Deutsche Bank Research, 2 March. Available at: https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000526938/German_energy_supply%3A_Oil%2C_coal_and_renewables_are.xhtml?rwnode=RPS_EN-PROD$PROD0000000000443780.

Lopez, G. (2022) “The Two Inflation Crises,” The New York Times, 19 October. Available at: https://www.nytimes.com/2022/10/19/briefing/inflation-britain-united-states-europe.html.

Huet, N. (2023)VB Collapse governments europe (no date). Available at: https://uk.news.yahoo.com/svb-collapse-governments-europe-dealing-164901696.html.

Jones, H. (2023)eu-says-silicon-valley-bank-collapse-has-limited-impact-bloc (2023). Available at: https://www.reuters.com/markets/europe/eu-says-silicon-valley-bank-collapse-has-limited-impact-bloc-2023-03- (Accessed: March 19, 2023).

McCabe, C. and Mitchell, J. (2023) Why Is Credit Suisse in Trouble? The Banking Turmoil Explained. Available at: https://www.wsj.com/articles/why-is-credit-suisse-in-trouble-the-banking-turmoil-explained-6f8ddb5b(Accessed: March 19, 2023).

Smith, E. (2023) Deutsche Bank is not the next Credit Suisse, analysts say as panic spreads. Available at: https://www.cnbc.com/2023/03/24/deutsche-bank-is-not-the-next-credit-suisse-analysts-say-as-panic-spreads.html(Accessed: March 19, 2023).

MarketScreener (no date) Deutsche Bank chief: High inflation requires further interest rate hikes | MarketScreener. Available at: https://www.marketscreener.com/quote/stock/DEUTSCHE-BANK-AG-56358396/news/Deutsche-Bank-chief-High-inflation-requires-further-interest-rate-hikes-42968353/(Accessed: March 19, 2023).