Deutsche Bank keeps rattling the market

The embattled German bank keeps rattling European stock markets and particularly European bank shares due to ongoing concerns about its potential capital shortfall, flawed business model and client defections.

And their case is not helped by the German government’s refusal to commit to a bailout of Deutsche Bank under a worst case scenario. With more than $200bn in liquidity reserves (vs only $60bn during the depths of the 2008-9 financial crisis), it seems that Deutsche Bank should be able to withstand marginal client defections without any problems. Furthermore, despite a weaker capital ratio than its European peers and massive litigation reserves, Deutsche Bank is still profitable, even though their return on equity is amongst the lowest in the industry.

Our view is that Deutsche Bank concerns will not go away unless the bank communicates a clear strategic plan and path towards sustainable profitability, something it has been unable to do so far. Its recent strategic decision to switch away from retail banking towards higher risk investment banking activities was wrong and needs to be reconsidered.