The Stock Price Of Deutsche Bank Recovers Despite Persistent Worries

After last week's collapse, Deutsche Bank DB -0.72% decreased; red down-pointing triangle shares regained lost ground on Monday. Yet, investors are still on edge and have begun to pick at the bank's flaws.

‍

The German lender's stock jumped 6%. Shares fell on Friday as concerns about the soundness of the global banking system grew in the aftermath of UBS Group AG's UBS -0.05% announcement.

‍

decline; red down-pointing triangle forced marriage with weaker rival Credit Suisse Group AG The cost of insuring against Deutsche Bank's default via credit-default swaps reduced Monday, but remains near pandemic levels.

‍

"It's hardly a great improvement. Overall morale is low, and investors are wary of banks, according to Joost Beaumont, head of bank research at Dutch lender ABN Amro.

‍

Deutsche Bank attempted to reassure investors Monday with an updated presentation of its financial results. The presentation highlighted the bank's deposit base and the proportionate extent of its exposure to areas that investors are concerned about, such as commercial real estate in the United States.

‍

As of December of last year, the bank said that 70% of its deposits were in Germany. Approximately half of the total comes from private consumers, while the other half comes from firms who do other business with the bank.

‍

According to Richard Barnes, a credit analyst at S&P Ratings, a third of the deposits are insured, which is comparable to other significant corporate investment banks in Europe.

‍

"It's a diversified depositor base," said Mr. Barnes. The fact that the majority are in Germany, Deutsche Bank's home market, is advantageous, he claims.

‍

One of the reasons Germany's largest bank is the first to be scrutinized when the industry is under duress is because of its turbulent past. For years, Deutsche Bank has struggled with poor profitability, excessive costs, and major scandals that have harmed its image with customers and authorities.

‍

Several of its ancient skeletons have been dealt with as part of the bank's multiyear cleaning operation, which began in 2018 with the appointment of Chief Executive Officer Christian Sewing. The bank has been continuously profitable, its cost as a percentage of revenue has decreased, and it is no longer mired in legal and regulatory issues.

‍

Yet, certain concerns remain. Concerns about landlords grappling with post-pandemic shifts in working habits have heightened the bank's exposure to commercial real estate. According to experts, Deutsche Bank is one of a few European banks with major exposure to commercial real estate in the United States.

‍

In its investor presentation, Deutsche Bank stated that commercial real estate accounts for 7% of its €489 billion ($526 billion) loan book. Another sector under attention is leveraged lending, which is higher-risk financing generally undertaken to assist takeover deals. It accounts for around 1% of total loans.

‍

Almost half of the €33 billion in commercial real-estate exposure is in the United States. According to JPMorgan analysts, the portfolio is broad in terms of commercial property categories. The majority of the assets it lends against are in major cities. Unlike during the 2008 financial crisis, loan-to-value ratios are more conservative, which means that if the bank took over the property in the event of a default, it could still sell it to satisfy the debt.

‍

"We consider this as a manageable concern," analysts at JPMorgan stated.

‍

Another source of concern: Deutsche Bank has a large exposure to difficult-to-value derivatives in comparison to rivals. They are designated as level-three assets in accounting terminology, which means there is no immediately visible market price.

‍

At its height in 2008, Deutsche Bank controlled a large portion of them, including €48.8 billion in derivatives. Nonetheless, it has recently reduced its derivatives book to less than €10 billion. Yet, the amount is the second-highest among large banks, trailing only JPMorgan Chase, a far larger bank in terms of assets, according to an analysis by Autonomous Research, a unit of AllianceBernstein.

‍

The derivatives portfolio is actively managed and changes composition often, implying that "this is not a legacy hazardous portfolio moldering away in some mis-marked long-forgotten back book," according to the research.

‍

According to Christian van Beek, chief analyst for Deutsche Bank at Scope Ratings, a greater concern for Deutsche Bank is what the previous month of market volatility and stress has done to not just its books, but also its earnings. Because of the uncertainty, the bank's funding costs are expected to rise. It may also incur increased fees when attempting to sell undesired assets, such as those in its derivatives portfolio.

‍

"It might be a difficult year in terms of absorbing these additional charges," Mr. van Beek predicted.

‍

Experts also believe that Deutsche Bank and others would spend more than expected to give higher deposit rates to consumers to keep them.

‍