After a tumultuous week for Deutsche Bank (DB) which saw the DOJ demand a $14 billion settlement for the bank’s past RMBS transgressions, it was another bad day for the giant German lender, whose stock and contingent converts tumbled after the investing community realized that even a modest $5.5 billion final settlement would leave it perilously undercapitalized and likely scrambling to raise more cash.
As SocGen’s Andrew Lim calculated, Germany’s biggest bank would be “significantly undercapitalized†even if an eventual settlement with the DoJ can be covered by the bank’s reserves. Any settlement above €5.4 billion would imply a capital increase is needed just to pay the fine, he wrote.
Taking prompt remedial action, news leaked over the afternoon that Deutsche Bank was hoping to bolster its balance sheet and boost its capitalization, when The Street first reported that it was trying to securitize at least some $5.5 billions of corporate loans to offload risk. The problem for Deutsche Bank, already ranked among the worst-capitalized lenders in European stress tests before the DOJ’s $14 billion demand, is that by admitting it is in balance sheet “recovery” mode it would make shareholders even more nervous: what if the bank failed to securitize those loans? Or what happens if yet another legal settlement arrives? Or, worst of all, what if Mario Draghi cuts rates again and pressures the bank’s inceome statement even more? There is little the bank can cut as is: CEO John Cryan already suspended the bank’s dividend to preserve capital and has repeatedly ruled out tapping investors for more; but if he has to, he surely will.
But not even that is the biggest problem facing Deutsche Bank.
Recall that several years ago, we were the first to point out the true “elephant in the room”, namely Deutsche Bank’s $75 trillion at the time in gross notional derivatives which as we said then was about 20 times bigger than Germany’s GDP, and 5 times bigger than the entire economic output of the Eurozone.” Much to the chagrin of those who did (and still do) accuse of being conspiratorial something or another, since then Deutsche Bank stocks has plunged, reaching all time lows as recently as a few months ago.
