Deutsche Bank’s slow bleed continues as pivotal month begins
NEW YORK: Deutsche Bank AG just ended a roller-coaster week. June doesn’t look any less harrowing.
Shares of Europe’s largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm’s health. It’s part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good.
First came the reports Thursday that the German lender is on a US regulatory watchlist for problem banks. Then on Friday, S&P Global Ratings cut its credit rating. In a sign of diminished standards, investors expressed relief that the grade dropped only one level.
“They dodged a bullet,” said David Hendler, founder of Viola Risk Advisors and an analyst.
In coming weeks, the lender will carry out thousands of job cuts as chief executive officer Christian Sewing pushes through a sweeping restructuring of the investment bank division.
Before month’s end, virtually all of Deutsche Bank’s US operations will finish undergoing the full scope of the Federal Reserve’s annual stress tests for the first time, with results to be made public. Sewing sought to shore up staff morale on Friday.
“Many of you are sick and tired of bad news,” he wrote in an open letter to employees. Yet the firm has taken many important steps, reorganising its business, reducing risk and building up capital, he said. “We’ll prove we have earned a better valuation on the financial markets.”
The drama is the talk of Wall Street, with executives at rival companies hoping to poach Deutsche Bank’s top moneymakers and clients. Meantime, key barometers of the firm’s health show investors are jittery heading into a pivotal month.
Credit-default swaps on Deutsche Bank’s debt reflect a bearishness not seen with any of its major rivals. The contracts are now trading roughly in line with beleaguered Italian banks buffeted by their government’s turmoil.
By midweek, five-year credit swaps on Deutsche Bank almost tripled from the year’s lows, then eased some after S&P’s decision, ending the week at 153 basis points.
S&P’s decision to lower the company’s rating to BBB+, the third-lowest investment grade, had more to do with the company’s ability to generate profits.