Doom at Deutsche Bank?

When even the BBC starts running about Deutsche being the most dangerous bank in the world, it's probably time to sit up and listen. Things haven't gone well for Deutsche since the Brexit vote, and they've been going even worse since the publication of that IMF report with that chart showing Deutsche at the nexus of global systemic risk. The bank's share price has dropped by 50% this year and by 4% today.

This hasn't escaped the notice of senior staff at Deutsche's investment bank in London and New York City. "People are panicking in a serious way," says one ex-Deutsche managing director. "I've taken at least two dozen calls in the past week from former colleagues asking my thoughts and advice. - They're worried about legal issues, Brexit issues and business model issues. The feeling is that Deutsche hasn't evolved like its peers - at least J.P. Morgan has a massive commercial bank and Morgan Stanley and Goldman Sachs have amazing equities and advisory franchises. Deutsche has none of that; it's got a very large fixed income business and it's sat in Europe."

It doesn't help that Deutsche's plummeting share price has wiped a fortune off the deferred bonuses of its most senior staff. Earlier this week we estimated that Deutsche's senior bankers had lost $213m on their 2015 bonuses since the referendum. However, given that Deutsche's top managing directors have their bonuses fully deferred for five years, this is only a fraction of the full damage. In 2011, Deutsche Bank's share price was around €41. Today it's €11.5. "The senior guys have had their bonuses since 2011 wiped out," says one headhunter. "Most of them would like to leave, but there's nowhere else to go."

Worse may be yet to come. Deutsche Bank operates an unusually punitive clawback policy under which the entire tranche of bonuses due to vest in any particular year is wiped out if the bank makes a loss at group level. This is apparently causing concern. "People are worried about forfeitures," says the ex-MD. "Given how hard it's been to make money lately, people are stressing about their next deferred payouts due in February."

Those concerns may not be without reason. Before the referendum, Deutsche CEO John Cryan indicated that the bank is unlikely to be profitable this year, but Deutsche's press office told our German editor that this wouldn't trigger clawbacks. As core profitability wanes, clawbacks could yet be back on the table.

Banking analysts think profitability at Deutsche will wane. At Morgan Stanley, the prediction is for a base case decline of 13% in Deutsche's operating profits this year, and for a bear case decline of 31%. Analysts at UBS expect Deutsche's profits will fall by 28% this year, compared to a mere 10% drop at Credit Suisse.

All this helps explain why Deutsche's recent employee satisfaction survey found that fewer than half of its staff are proud to work there.

The good news is that Deutsche CEO John Cryan has a plan for fixing things. The bad news is that in the wake of the UK referendum, his plan may be unworkable. Morgan Stanley's banking analysts note that Deutsche is one of several banks (also including Credit Suisse and Unicredit) with a, 'material capital gap' compared to the new regulatory standards to be implemented by 2019. Cryan had planned to cover this gap by selling Postbank along with €90bn of risk weighted assets, but doing so is likely to be tough in the new market environment. On June 26th, Christian Sewing, Deutsche's new head of retail banking told German newspaper FAS that the bank is prepared to wait out the Postbank sale until it can achieve an, "appropriate price."

This is leading some people to look again at the worrisome report that came out of Berenberg earlier this year. Then, Berenberg analyst James Chappell said Deutsche looked dangerously over-levered, with a 40:1 ratio of assets to shareholders' equity (Lehman had 31:1 when it went under). Deutsche had two choices, said Chappell: it could sell assets or it could raise capital. Even in May, neither option seemed feasible, prompting Chappel to declare that Deutsche faced, "insurmountable headwinds" and that the stock should be sold off.

Deutsche Bank declined to comment on speculation about its future.

Stefan Mueller, a Frankfurt-based former proprietary trader from Dresdner and Sal Oppenheim who now runs German brokerage DWGA suggested Brexit may yet strengthen the hand of conservative forces within Deutsche Bank in Germany. "People need to understand that Deutsche was the pride of Germany," says Mueller. "That it was the biggest, strongest, bank in the world and then it started buying up in investment banks and becoming involved in trading. Since then it's stepped into every disaster going. Working for Deutsche Bank used to be something you were very proud of; not any more."

In May, Cryan said that Deutsche was "committed, unreservedly" to its trading business. Mueller thinks this will change. If the City of London loses its "passporting right" into the EU and if alternative "equivalence" rules don't compensate, Deutsche will need to move some of the 6,000 or so staff it employs in London to Germany. At that point, Mueller predicts that Deutsche's conservative corporate bankers will play their hand. "Deutsche Bank will be split into two - an investment bank that's run out of London and a corporate and retail bank that's run out of Germany. Brexit has given Deutsche's German conservatives the chance they've been waiting for."