Daily Management Review

Deutsche Bank heads for further austerity


The leading German financial institution Deutsche Bank has unexpectedly completed the third quarter of 2016 with a profit. Over the past three months, the bank earned 278 million after taxes, dpa agency reported in Thursday, October 27, citing the bank’s message. This was significantly above analysts' expectations, whose line of thoughts was based on expectations that Deutsche Bank was to end the quarter with multi-million dollar losses.

Justin Pickard
Justin Pickard
However, Head of Deutsche Bank John Cryan on Thursday sent a letter to the bank's staff, in which warned of a need for more tough austerity measures. The financial conglomerate is going to cut 9,000 jobs throughout the world, and close up to 700 branches. In addition, on Thursday the bank announced closing of operations in Mexico.

Cryan has warned that "external conditions deteriorated" for the bank. For one thing, Deutsche Bank has not yet completed a trial with the US authorities, which have accusing the financial conglomerate in irregularities in transactions with mortgage-backed securities in the period before the 2008 crisis. The authorities that the bank pays $ 14 billion in penalties, yet it is expected that the final amount will be less. At the same time, Deutsche Bank has made a purse of 5.9 billion euros to pay the fine, according to data on the third quarter.

Many financial analysts, as well management of the IMF have expressed critical comments on the bank's long-term business model.

Meanwhile, investors frightened with the prospect of the huge fine are withdrawing large sums from Deutsche Bank’s accounts. In the third quarter of 2016, liquidity of the financial institution has decreased by €23 to € 200 billion, according to the report. Cash outflow accelerated in late September yet "has been stabilized since then", CFO Marcus Schenck assured analysts during a conference call on Thursday.

Investors’ anxiety is also ignited by the fact that Bank of England, according to a recent report of Financial Times, has demanded from the leading British banks to disclose information about how their business is related to Deutsche Bank.

Deutsche Bank has already been compared with American investment bank Lehman Brothers, which bankruptcy in 2008 became wildfire of the global financial crisis. Piles of derivatives on Deutsche Bank’s balance sheet now causes particular concern. "Deutsche Bank has a very complex investment division with a large-scale trading of derivatives, - said Christopher Wheeler, a banking analyst at Atlantic Equities in London. - And it is not clear how great the risk in this portfolio is."

"If European banks get in a difficult situation, other banks also feel the pressure", - said Martin Helme from the Frankfurt School of Finance and Management. First of all, this applies to banks that are actively involved in commercial transactions, such as, for example, Deutsche Bank. 
Nevertheless, it is unlikely that the German giant would have to apply for financial aid, would inherit fate of Lehman Brothers, or would have to declare bankruptcy, he said. In his opinion, Deutsche Bank is now facing a long and painful period of restructuring, "It can even reach such an extent that the bank will be divided into different business lines."

London analyst Christopher Wheeler convinced that Deutsche Bank is able to cope with difficulties on its own, and to borrow is the last resort. Yet, Deutsche Bank is unlikely to go to the bottom even during crisis, the analyst adds. "The solution is already in its title: Deutsche Bank (the German Bank), - says Wheeler. -Germany will do everything to help the bank cope with the problems". 

source: dw.de