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Deutsche Bank (DB) has been a popular subject of journalist Arno Wellens for years. On the YouTube channel of Café Weltschmerz discussed in detail the bank's financial problems. The bank's share price is so low for a reason, Wellens concluded. In recent years, legislators, regulators and the bank's management have been working to make the bank healthier. Is Deutsche Bank still in such bad shape, or is the bank doing a little better? Holland Gold asked Arno Wellens.
In 2019, due to the major problems at the bank, plans were drawn up to improve DB's position. For example, there was a restructuring of the bank, which was more than 18,000 jobs Took. Another important change concerned the department where 'the sick cows' (as Wellens called it in 2019) were stored. To be precise, there were 370 billion sick cows in 2018; That was the total value of the assets at the bottom of the balance sheet of the Capital Release Unit (CRU) in 2018. The CRU's task was to rid the bank of the bad assets, in order to reduce the risk that the bank ran.
As an example of the bank's poor assets, Wellens cited a loss-making casino. Part of the extensive derivatives portfolio was also transferred to the CRU. As a result, the department had a negative turnover. So the department cost the bank a lot of money. For the settlement of the derivatives portfolio alone, 1.1 billion set aside.
However, the 2022 annual report states that from 2023 onwards, the CRU will no longer be seen as a separate entity. It is also striking that the CRU's income statement already looked better in 2022. For example, turnover has been reduced to -28 million, compared to -225 million in 2020. Total assets have also been reduced, from 198 billion in 2020 to 62 billion in 2022. So there are still problem assets, but fewer compared to previous years. While it's not clear whether all bad assets were brought under the CRU, it could be that DB is discredited from most of the Legacy assets has been stripped away.
Deutsche Bank's result as a whole also shows a more positive picture. Where the profit in 2020 is still 624 million this was already the case in 2021 Quadrupled, to 2.5 billion. In 2022, there was more than 5.6 billion at the bottom of the income statement and in the first half of 2023, the profit came in with 3.3 billion euro at its highest level since 2011. These numbers are much better than a bank that is in serious trouble. While Deutsche Bank has been profitable for 14 quarters now, Credit Suisse has presented regularly Red figures. The toughest time for European banks seems to be behind us. In the Netherlands, ABN AMRO posted a strong profit of 523 million. In America, banks face more competition from money market funds, which often offer high interest rates.
The better figures do not yet seem to convince investors on the stock market. The price is still very low compared to its value before the credit crisis started. Whereas in 2007 investors paid more than 90 euros for a share, today the share fluctuates around 10 euros. The years before 2008 were also the years in which the bank presented very good figures. In 2007, for example, a profit of 6.5 billion euros was made.
The stock took a hit this year after Credit Suisse began to falter. Still, the fall in DB's share price was mainly a case of market panic. Indeed, when Credit Suisse collapsed, regulators chose to bypass a special group of bondholders. Normally, shareholders will have to take the first blows in the event of bankruptcy, but in Switzerland it is different. Investors with the relevant AT1 Bonds while shareholders did get part of their investment back.
This created a high demand for insurance for the bonds, called derivatives Credit default swaps. But after the price of this insurance for Credit Suisse rose sharply, investors also started buying insurance for other bonds, including bonds for Deutsche Bank. And then the price of Credit default swaps Deutsche Bank's share price fell, even though this had nothing to do with the bank's profitability or solvency at the time.
We asked Arno Wellens, financial journalist, about the state of Deutsche Bank and the CRU. 'The positive thing is that they have managed to dump many of the bad assets,' says Wellens. However, the journalist does point to the fact that banks have lost these assets with the help of governments. Such a transaction is carried out through a so-called Put Option, a derivative previously used by the Latvian bank Parex. Parties such as Goldman Sachs buy the problem assets at a substantial discount and at the same time receive a guarantee from the government. In this way, the buying party avoids the risk and a bank such as Deutsche Bank gets rid of its problem assets. This does mean that losses may end up with the government and no longer with the bank that created the problem loans.
During the corona crisis, banks are likely to be of much use in this way. Non-performing loans (NPLs). Normally, you would expect an increase in NPLs when shops are forced to close their doors. Nevertheless, the item of non-performing loans declined sharply during that time. 'The question now is where those problem loans have gone and whether there is a feedback scheme, whereby the German government, for example, can be held liable if a loss is still incurred on the loans,' says Wellens.
According to Wellens, there is also a caveat to be made about the bank's high profits. Banks benefit from the ECB's higher policy rate. On Holland Gold we also wrote earlier that central banks are going to suffer big losses. Commercial banks now receive a generous fee on the excess reserves, while the interest they pay to account holders is still lagging behind. According to Wellens, the restructuring that the bank has implemented is a good sign, but the current profit is largely explained by higher interest rates. Dutch banks are now also making big profits.
Although banks are now in good shape on paper, society has paid a high price for them, says Wellens. 'I have called some banks technically bankrupt, and that differs from a situation in which a bankruptcy is also legally declared. If banks are bailed out by society, they will always have enough resources to meet their obligations and they will not collapse."
The problem that arises in banks is part of a European problem. Not only commercial banks, Wellens says, but also central banks are now full of problem debt. Central banks are prepared to intervene if there is a spark of panic. "Italy is violating all fiscal rules, but it is not being punished by the market. This is because the ECB has bought 600 billion euros of debt during its purchase policy and thus keeps the interest rate on government bonds low,' says Wellens, who also elaborated on this in detail in his book 'The Euro Gospel'.
This creates an artificial situation. During the euro crisis, for example, markets were calmed down by statements by ECB President Mario Draghi, so-called 'open-mouth operations'. According to the journalist, the current situation, in which countries are not punished and keep relatively low interest rates, can continue as long as the ECB continues with that policy. Wellens expects that central banks will soon continue with this kind of unconventional policy, even though they are now forced to stop this policy due to high inflation.
Deutsche Bank's situation is therefore twofold. On the one hand, the bank seems to be in a stronger position than it was a few years ago. For example, profits are substantial and many non-performing loans seem to have disappeared from the balance sheet. On the other hand, this is also the result of the generous support given by governments, by means of the construction explained by Arno Wellens. How Deutsche Bank will fare in the coming years will therefore partly depend on the ECB's policy rate, but will also depend on the party that has to bear the losses of the sold problem loans.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
