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Chart: The Epic Collapse of Deutsche Bank

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Chart: The Epic Collapse of Deutsche Bank

The Epic Collapse of Deutsche Bank [Chart]

A timeline showing the fall of one of Europe’s most iconic financial institutions

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

It’s been almost 10 years in the making, but the fate of one of Europe’s most important financial institutions appears to be sealed.

After a hard-hitting sequence of scandals, poor decisions, and unfortunate events, Frankfurt-based Deutsche Bank shares are now down -48% on the year to $12.60, which is a record-setting low.

Even more stunning is the long-term view of the German institution’s downward spiral.

With a modest $15.8 billion in market capitalization, shares of the 147-year-old company now trade for a paltry 8% of its peak price in May 2007.

The Beginning of the End

If the deaths of Lehman Brothers and Bear Stearns were quick and painless, the coming demise of Deutsche Bank has been long, drawn out, and painful.

In recent times, Deutsche Bank’s investment banking division has been among the largest in the world, comparable in size to Goldman Sachs, JP Morgan, Bank of America, and Citigroup. However, unlike those other names, Deutsche Bank has been walking wounded since the Financial Crisis, and the German bank has never been able to fully recover.

It’s ironic, because in 2009, the company’s CEO Josef Ackermann boldly proclaimed that Deutsche Bank had plenty of capital, and that it was weathering the crisis better than its competitors.

It turned out, however, that the bank was actually hiding $12 billion in losses to avoid a government bailout. Meanwhile, much of the money the bank did make during this turbulent time in the markets stemmed from the manipulation of Libor rates. Those “wins” were short-lived, since the eventual fine to end the Libor probe would be a record-setting $2.5 billion.

The bank finally had to admit that it actually needed more capital.

In 2013, it raised €3 billion with a rights issue, claiming that no additional funds would be needed. Then in 2014 the bank head-scratchingly proceeded to raise €1.5 billion, and after that, another €8 billion.

A Series of Unfortunate Events

In recent years, Deutsche Bank has desperately been trying to reinvent itself.

Having gone through multiple CEOs since the Financial Crisis, the latest attempt at reinvention involves a massive overhaul of operations and staff announced by co-CEO John Cryan in October 2015. The bank is now in the process of cutting 9,000 employees and ceasing operations in 10 countries. This is where our timeline of Deutsche Bank’s most recent woes begins – and the last six months, in particular, have been fast and furious.

Deutsche Bank started the year by announcing a record-setting loss in 2015 of €6.8 billion.

Cryan went on an immediate PR binge, proclaiming that the bank was “rock solid”. German Finance Minister Wolfgang Schäuble even went out of his way to say he had “no concerns” about Deutsche Bank.

Translation: things are in full-on crisis mode.

In the following weeks, here’s what happened:

  • May 16, 2016: Berenberg Bank warns that DB’s woes may be “insurmountable”, noting that DB is more than 40x levered.
  • June 2, 2016: Two ex-DB employees are charged in ongoing U.S. Libor probe for rigging interest rates. Meanwhile, the UK’s Financial Conduct Authority says there are at least 29 DB employees involved in the scandal.
  • June 23, 2016: Brexit decision hits DB hard. The bank is the largest European bank in London and receives 19% of its revenues from the UK.
  • June 29, 2016: IMF issues statement that “DB appears to be the most important net contributor to systemic risks”.
  • June 30, 2016: Federal Reserve announces that DB fails Fed stress test in US, due to “poor risk management and financial planning”.

Doesn’t sound “rock solid”, does it?

Now the real question: what happens to Deutsche Bank’s derivative book, which has a notional value of €52 trillion, if the bank is insolvent?

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Markets

How Disinflation Could Affect Company Financing

History signals that after a period of slowing inflation—also known as disinflation—debt and equity issuance expands.

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Chart showing U.S. Equity Issuance Deal Value from 1980-2000. Equity Issuance goes up over time, with the 300% increase in 1983 highlighted at the end of the disinflation period.
The following content is sponsored by Citizens Commercial Banking

How Disinflation Could Affect Company Financing

The macroeconomic environment is shifting. Since the second half of 2022, the pace of U.S. inflation has been dropping.

We explore how this disinflation may affect company financing in Part 2 of our Understanding Market Trends series from Citizens.

Disinflation vs. Deflation

The last time inflation climbed above 9% and then dropped was in the early 1980’s.

Time PeriodMarch 1980-July 1983June 2022-April 2023*
Inflation at Start of Cycle14.8%9.1%
Inflation at End of Cycle2.5%4.9%

* The June 2022-April 2023 cycle is ongoing. Source: Federal Reserve. Inflation is based on the Consumer Price Index.

A decrease in the rate of inflation is known as disinflation. It differs from deflation, which is a negative inflation rate like the U.S. experienced at the end of the Global Financial Crisis in 2009.

How might slowing inflation affect the amount of debt and equity available to companies?

Looking to History

There are many factors that influence capital markets, such as technological advances, monetary policy, and regulatory changes.

With this caveat in mind, history signals that both debt and equity issuance expand after a period of disinflation.

Equity Issuance

Companies issued low levels of stock during the ‘80s disinflation period, but issuance later rose nearly 300% in 1983.

YearDeal Value
1980$2.6B
1981$5.0B
1982$3.6B
1983$13.5B
1984$2.5B
1985$12.0B
1986$24.2B
1987$24.9B
1988$16.9B
1989$12.9B
1990$13.4B
1991$45.2B
1992$50.3B
1993$95.3B
1994$63.7B
1995$79.7B
1996$108.7B
1997$106.5B
1998$97.0B
1999$142.8B
2000$156.5B

Source: Bloomberg. U.S. public equity issuance dollar volume that includes both initial and follow-on offerings and excludes convertibles.

Issuance grew quickly in the years that followed. Other factors also influenced issuance, such as the macroeconomic expansion, productivity growth, and the dotcom boom of the ‘90s.

Debt Issuance

Similarly, companies issued low debt during the ‘80s disinflation, but levels began to increase substantially in later years.

YearDeal Value Interest Rate
1980$4.5B11.4%
1981$6.7B13.9%
1982$14.5B13.0%
1983$8.1B11.1%
1984$25.7B12.5%
1985$46.4B10.6%
1986$47.1B7.7%
1987$26.4B8.4%
1988$24.7B8.9%
1989$29.9B8.5%
1990$40.2B8.6%
1991$41.6B7.9%
1992$50.0B7.0%
1993$487.8B5.9%
1994$526.4B7.1%
1995$632.7B6.6%
1996$906.0B6.4%
1997$1.3T6.4%
1998$1.8T5.3%
1999$1.8T5.7%
2000$2.8T6.0%

Source: Dealogic, Federal Reserve. Data reflects U.S. debt issuance dollar volume across several deal types including: Asset Backed Securities, U.S. Agency, Non-U.S. Agency, High Yield, Investment Grade, Government Backed, Mortgage Backed, Medium Term Notes, Covered Bonds, Preferreds, and Supranational. Interest Rate is the 10 Year Treasury Yield.

As interest rates dropped and debt capital markets matured, issuing debt became cheaper and corporations seized this opportunity.

It’s worth noting that debt issuance was also impacted by other factors, like the maturity of the high-yield debt market and growth in non-bank lenders such as hedge funds and pension funds.

Then vs. Now

Could the U.S. see levels of capital financing similar to what happened during the ‘80s disinflation? There are many economic differences between then and now.

Consider how various indicators differed 10 months into each disinflationary period.

January 1981April 2023*
Inflation Rate
Annual
11.8%4.9%
Inflation Expectations
Next 12 Months
9.5%4.5%
Interest Rate
10-Yr Treasury Yield
12.6%3.7%
Unemployment Rate
Seasonally Adjusted
7.5%3.4%
Nominal Wage Growth
Annual, Seasonally Adjusted
9.3%5.0%
After-Tax Corporate Profits
As Share of Gross Value Added
9.1%13.8%

* Data for inflation expectations and interest rate is as of May 2023, data for corporate profits is as of Q4 1980 and Q1 2023. Inflation is a year-over-year inflation rate based on the Consumer Price Index. Source: Federal Reserve.

The U.S. economy is in a better position when it comes to factors like inflation, unemployment, and corporate profits. On the other hand, fears of an upcoming recession and turmoil in the banking sector have led to volatility.

What to Consider During Disinflation

Amid uncertainty in financial markets, lenders and investors may be more cautious. Companies will need to be strategic about how they approach capital financing.

  • High-quality, profitable companies could be well positioned for IPOs as investors are placing more focus on cash flow.
  • High-growth companies could face fewer options as lenders become more selective and could consider alternative forms of equity and private debt.
  • Companies with lower credit ratings could find debt more expensive as lenders charge higher rates to account for market volatility.

In uncertain times, it’s critical for businesses to work with the right advisor to find—and take advantage of—financing opportunities.

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