A very concerning balance sheet.
There is volatility in the market and risk sentiment is largely increasing. The JP Morgan Volatility index is now around its highest level in twelve months. In particular, there are huge concerns that Deutsche Bank may be in a very difficult situation. Its stock price has lost more than 50% in less than a year. The share is currently trading above €15, increasing only because of buyback news. This bank is well known to have the biggest derivatives exposure in the world – currently estimated at around €55 trillion, compared to German GDP which tops around €3 trillion -. In addition, the amount of deposit is around €532 billion, representing less than 1% of the overall derivatives exposure. However, markets do not clearly fear, at the moment, the derivatives exposure but more a fixed income product whose name is CoCo. This product is almost unknown from the general public. DB has €1.75 billion worth of CoCo bonds which trading price fell below 75 cents. The issue is that CoCos are kind of perpetual bonds which may only be redeemed from the bank’s decision. Investors chose those kind of instrument under the assumption that these securities could be converted to equity. Yet, Deutsche Bank stock price has declined 25% since the beginning of the year. Last but not least, Cocos belong to the high-yield securities class which allows bank to skip interest on them in case of the bank is running with difficulties.
Future looks uncertain.
Those uncertainties brought German Finance Minister Wolfgang Schauble to declare that he is not worried about Deutsche Bank’s solidity in order to prevent any fears that would result from ongoing uncertainties. Yet, we remain suspicious regarding the bank’s ability to meet its CoCo obligations. The bank also needs to meet Tier 1 capital ratio of 10.75% this year.
The bank’s situation is definitely very concerning. For example, last October, CEO John Cryan had announced two years of dividend cuts and in January it is no more than 15’000 jobs that will be sacrificed. As a result CDS on DB (a contract that gives protection against the default risk of the German bank) is currently largely increasing. We also consider that the German bank’s issues are a reflection of the overall banking situation. This certainly justifies the huge increase in demand for physical gold in London over the past week.