One of the things nobody mentioned at Davos last week was that as of now, the number of UK plc companies issuing profit warnings is at its highest level since 2008. It wasn’t mentioned because that would fly in the face of an apologist narrative telling us how “the markets have gone nuts, but the world’s economies are in good shape”.
My own view remains that Correction2 is now more or less over, but there are still a massive range of goolies out there of enough weight to set off numbers 3, 4 and 5.
Lost in the midst of last week’s reset bounce was one of them: Deutsche Bank.
On €33bn of turnover last year, Deutsche Bank lost €6.7bn. As the world was rallying towards a new paradigm late last week, this got scant attention. Which is, let’s face it, ridiculous.
Deutsche is one of the more strategically important banks in the world, but for nearly two years now it has been of concern to analysts.
We never did get a satisfactory explanation as to why, in April of 2014, Deutsche Bank had to raise an additional €1.5 Billion of Tier 1 capital in a hurry. Or why, a month later, DB announced the selling of €8 billion euro of stock – at up to a 30% discount. In March 2015, the Bank failed the banking industry’s “stress tests” – and then a month later was hit for a massive $2.1 billion charge as a result of LIBOR criminality.
Lots of senior bods then left in a hurry, following which Standard & Poors downgraded it to BBB+ – a notch lower than Lehman went to immediately prior to its collapse. In October last, the bank fired 15,000; and now we get these awful results.
My hunch has always been that DB needed all the cost reductions and new capital to make itself ‘immune to’ first, bad debt exposure in ClubMed, and second, bad-bet derivatives.
A default in Greece would’ve been enough on its own to topple the bank. Now that country is effectively a vassal of the Eurogroup, such a risk has receded. But a similar outcome in Spain would blow Deutsche off the map.
I’ve always maintained that perseverance with the threat to default would have delivered Athens from Evil, but it was not to be.
Anyway, the banks are fine now and everything’s different….except for Deutsche. And RBS. Oh, and Santander, Monte del Peische, and the one in Paris that dare not speak its name. And whatever Bryan Moynihan says (didn’t he look nervous at Davos last week?) Bank of America.
But the DB numbers deserve rather closer attention than those busy drawing attention to attention-getting distractions would like….if only because the bank is sitting on the nastiest derivative mountain on the planet.
It is in perpetual need of ‘cover-money’….as the new Annual Report suggests.
For example, the bank’s 2015 loss represents a negative margin of almost exactly 20%: so for every €5 of business turnover the bank did, they blew €1 of profit. I like to keep things simple, and that is simply appalling. It’s appalling for the following two reasons.
First, under the fractional reserve accounting system, the vast majority of loans granted carry an aggregate margin (usury plus digital funny money) of around 85%. To lose money in that context involves a long and uproarious further education at the University of Dork, having convinced the selection committee after High School that you already have the inbuilt requirements for acceptance at this prestigious college – viz, searing intelligence coupled with a moronic sense of judgement.
Second, whatever your accountancy reporting scam of choice is, even a mediocre year can be made to look good if, for example, mysterious sums appear under headings like ‘incremental earnings’, which last year were in the ‘dormant account set-asides’ column.
In short, to have an appalling year as a multinational bank, you must have had the sort of annus horribilis awarded to Gordon Brown in 2010. And, quite possibly, the same personality challenges he tried so valiantly to overcome through cognitive abusive phone-chucking therapy.
Those with an auditor’s brain should feel free to crawl all over Deutsche’s annual report as and when; suffice to record here that – using the Sherlock Holmes principle of probability elimination – there must be some serious structural problems in the bank. Just putting a little flesh on the the architectural-engineer analogy, it’s hard to avoid the conclusion that DB’s outlook is akin to that of a jerry-built Victorian London terrace sitting on the San Andreas Fault, having employed the original GE engineers at Fukushima to deliver the world’s first meltdown-driven geothermal heating system in order to shore up the foundations.
I’ve been following Deutsche’s wriggle-political-drivel-stress-test-dubious-practices saga for nearly six years. In the press release accompanying the latest results, Deutsche laid out the ‘reasons’ for its disastrous performance as ‘severance and restructuring charges….writedowns, litigation charges and a very difficult trading climate…’.
That blamestorming session evokes neither sympathy nor confidence: ‘severance and restructuring’ means having to fire a lot of people (not a sign of powering forward) ‘writedowns’ is a euphemism for bad debts, ‘litigation charges’ = the costs of cheating people, and ‘ very difficult trading climate’ cannot begin to explain how three US banking firms last week published results suggesting the climate was near-perfect rather than very difficult.
Here is a mind-concentrating fact: following these results, the stock market valuation of Deutsche means it is now smaller than Danske Bank. Even if you don’t stop in your tracks on reading that, aficinados of the sector will.
Now, there is an argument that says if you keep making a loose volcano smaller and smaller, in the end you render it harmless. But (a) nobody has ever managed to downsize Vesuvius and (b) failing banks don’t work like that.
Banks with huge writedowns in a conservative lending era are banks whose borrower targeting systems are overwhelmed by f**kwitted lending-level targets based on bonusing by ‘results’.
Banks with huge losses in one less than apocalyptic fiscal year are banks whose un-netted risks are being slowly introduced into the p&l in the hope that Everest will one day become Ben Nevis.
Deutsche Bank has long been fingered as the planet’s biggest single institutional exposure to bad derivative contract bets. It continues to try and make that exposure less globally explosive: but the reduction process is based on things staying stable until around 2028.
That isn’t going to happen.