The chaos began just after midnight on June 24. When the BBC announced the northern English city of Sunderland had voted for Brexit by a large majority, it became clear for the first time that the British really could say “No” to the European Union.
Orders then began to flood investment banks, as the pound plummeted and investors fled to safer government securities. It was a stress test that traders and systems had not seen since the Lehman bankruptcy in 2008.
Caught right in the middle was Deutsche Bank, one of the biggest players on global currency and bond markets. By the end of this memorable day, the financial institution had handled eight times as many orders as on a normal day.
The bank earned money through Brexit, at least for one day. But in the long term, things look quite different. Investors’ uncertainty before the referendum and subsequent paralysis after it have apparently choked the bank’s profit engine, according to analysts.
We see a risk that it could be a challenge for Deutsche Bank to meet the targets set in its ‘Strategy 2020,’ if the operational field remains so adverse. Standard & Poor's, ratings agency
This Wednesday, chief executive John Cryan will present second-quarter figures. On average, experts predict only minimal net profits of €11 million, or about $12.1 million.
Last year the bank earned €818 million. And in the first quarter of 2016, it was still €236 million ($260 million) in the black.
The 16 analysts, whose estimates were made public by the bank in a consensus prediction on its website, forecast the most severe drop will be in the crucial area of trading transactions. According to that forecast, the bank’s traders will only achieve pre-tax profits of €265 million in the second quarter. The year before, it was more than €1 billion.
Huw van Steenis, a British research analyst at Morgan Stanley, fears the Brexit shock could have a lasting impact on trading.
The business in currencies, bonds and derivatives – the bank's traditional strength – was already weakening before the Brexit vote. The underlying causes, besides ultra-low interest rates and the fear of a slowdown in global economic growth, are stricter requirements imposed by regulators.
Mr. van Steenis warned that it will take years for Europe’s investment banks to adjust to tougher conditions. By 2018, institutions such as Deutsche Bank, Barclays or Credit Suisse won’t be able to earn enough through trading alone.
Deutsche Bank has gone through turbulent weeks recently.
At the end of June, its U.S. subsidiary failed the stress test conducted by the Federal Reserve Bank. Then the International Monetary Fund named Deutsche Bank as the institution that harbors the greatest risk to the financial system. Then, at the beginning of July, its share price fell to an all-time low as risk premiums for credit default swaps shot up dramatically.
It’s possible the bank’s rating could be lowered to “BBB,” only two levels above so-called junk status.
The most recent setback came on Tuesday when Standard & Poor’s lowered its assessment of the bank’s credit rating.
“We see a risk that it could be a challenge for Deutsche Bank to meet the targets set in its ‘Strategy 2020,’ if the operational field remains so adverse,” said the ratings agency. It’s possible the bank’s rating could be lowered to “BBB,” only two levels above so-called junk status.
One large shareholder said “a decline in profits would be a severe blow and reignite discussion over whether (Deutsche Bank’s) business model is feasible.”
Mr. Cryan has ordered far-reaching restructuring at the bank, but up to now has not questioned the dominant role of currency and bond trading.
In 2015, the entire involvement in trading brought in revenues of €10.5 billion ($11.6 billion), nearly a third of the bank’s earnings. At €7.4 billion, the lion’s share came from the business in bonds, currencies and derivatives.
But in the meantime, even Mr. Cryan sees indications that a large part of returns that have vanished since the financial crisis will not return. “We must turn more attention toward our trading transactions,” he said at an investors conference this spring.
At least frustrated stockholders can’t claim that Mr. Cryan didn’t warn them. In early 2016 the Briton made it clear that, above all, he intended to clean up shop this year. And he proposed an interesting equation: The worse the final result, the quicker the progress in expensive restructuring.
By that reasoning, 2016 could be a successful year: On average, analysts predict the bank will lose €858 million for the entire 12 months.
Admittedly, that would be less than the record minus of €6.7 billion in 2015. But it would also be far above the moderately red figures that Mr. Cryan has prepared investors for up to now.
It must be said that estimates of the 16 analysts diverge widely, and the results are strongly dependent on what assumptions they make about company restructuring and legal risks.
On average, the analysts predict restructuring expenses of €1.1 billion and legal risks of €2.3 billion for 2016.
“If the profit drought actually continues, then (fall 2016) will see renewed discussion about the chairman of the supervisory board, Paul Achleitner,” warned one large investor. “You can set your clock to that timetable.”
Some shareholders have complained that Mr. Achleitner clung for far too long to former co-CEOs Anshu Jain and Jürgen Fitschen. He shares responsibility for the bank’s miserable situation, they say.
Recently, however, Mr. Achleitner was backed up by the bank’s two most important shareholders. Two members of the ruling Al Thani family from Qatar increased their holdings to a total of almost 10 percent.
The Al Thani investors had made it clear beforehand that they intended to stand behind Mr. Achleitner and hoped for a renewal of his contract, which runs until 2017.
Michael Maisch is the deputy chief of Handelsblatt's finance desk in Frankfurt. To contact the author: [email protected]