What’s Going On Here?

The $1 billion of profit Deutsche Bank‘s investors were expecting this year will probably be a loss instead.

What Does This Mean?

• Deutsche Bank’s been struggling for a while:
  • losing market share and
  • getting embroiled in money laundering scandals.

Money laundering is the process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions.

• In May, Deutsche said it planned to restructure; now it appears to be planning to
  • cut 22% of its total workers,
  • targeting riskier parts of the business like stock and bond trading in the US.

• Investors had thought Deutsche’s pass in the US banking “stress tests” last week may be a sign of better times ahead. But firing people and reshaping the company in order to lower future costs could involve Deutsche Bank forking out an extra $6 billion this year.

Why Should I Care?

For markets: Deutsche Bank has run out of options.

• Deutsche’s troubles were well signposted, so the potential cost, while large, left investors unfazed. Still, its stock price has fallen 25% in the last year compared to European banks’ average 15% decline.
• Another bailout from the German government shouldn’t be necessary if Deutsche’s restructuring plan works; Switzerland’s Credit Suisse has shown turnarounds can work. But Deutsche’s got a difficult road ahead: having failed to agree on a merger with local rival Commerzbank, it’s now looking at selling off parts of its business to competitors.

Bailout is an act of giving financial assistance to a failing business or economy to save it from collapse.

Zooming out: Santander also has an expensive cost-saving plan.

• Deutsche Bank has had five CEOs since 2012. But Spain’s Santander has also struggled with executive recruitment. When it approached a senior banker from Swiss rival UBS for its top job, he duly accepted – only to see Santander withdraw its offer and leave him jobless.
• Santander had backed out due to the expense of the hire, but it may now be on the hook for $113 million if its would-be CEO’s lawsuit is successful.

Content source: Finimize. (2019) Deutsche Blank. Available from: https://www.finimize.com/wp/news/deutsche-blank/ [Accessed 10 July 2019]