Just when stock-market bulls thought it was safe to go back in the water after Italy’s political crisis stirred a bout of global turmoil, some wary investors and market watchers are ringing alarm bells over Deutsche Bank.
“To this observer (who has consistently warned about Deutsche Bank being the next Black Swan and the imbalances in the European banking system (particularly in Italy)), the risks of a possible negative multiplier effect on other European financial intermediaries and on the region’s economic prospects is profoundly real,” wrote hedge-fund manager Doug Kass in an email to clients Thursday.
As popularized by Nassim Nicholas Taleb in his book, “The Black Swan,” such events, also known as “tail risks,” are events that are rare and unexpected but carry an extreme impact.
But other investors are skeptical, arguing that while Deutsche Bank has plenty of difficulties, it doesn’t represent a systemic risk. The problem, they say, isn’t with the bank’s balance sheet, which is less leveraged than in the past, but with falling revenue and the difficulties in implementing a far-reaching restructuring program, including hefty job cuts.
The majority of the bank’s revenues still come from the trading side of the business, “and that’s probably the biggest problem,” said Kevin Kelly, chief executive and managing partner of Benchmark Investments.
Deutsche Bank is underperforming its U.S. peers and in part that’s because the company’s “signaling” to the market of its intentions to scale back its global investment banking business, its U.S. footprint and other operations.
”If I’m a counterparty, I’m not going to increase my trading with Deutsche Bank given the CEO’s recent rhetoric,” he said. That, rather than the danger of “contagion” is the biggest risk, Kelly said.
Others also argued that operational issues are the bigger danger:
Excellent piece from Paul. Deutschepocalypse, if it comes, won't be because of the financial condition, which is actually pretty middle of the road. What frightens regulators is the operational risk overhang. https://t.co/LRh5N8keMm
— Dan Davies (@dsquareddigest) June 1, 2018
Shares of the troubled German banking giant DBK, +2.76% DB, -0.36% rebounded 3.6% in Frankfurt on Friday but ended the week down 8.6% and are off more than 40% in 2018. Shares were slammed Thursday after it was revealed that the Federal Reserve had designated its U.S. business in “troubled condition,” one of the lowest designations employed by the central bank.
Deutsche Bank was downgraded Friday by S&P Global Ratings, which cited concerns over the company’s restructuring plans.
Read: Deutsche Bank stock is looking cheap after 40% slide, but analysts remain wary
Worries about the fallout from trouble at Deutsche Bank aren’t new. Jitters surrounding Deutsche Bank and its derivatives book briefly roiled markets in the autumn of 2016.
See: Christian Sewing implores all of Deutsche Bank to prove that ravaged stock price is wrong
The Global Macro Monitor blog has also included Deutsche Bank in its “Swan Watch,” in which it defines a “macro swan” as any global macroeconomic or financial event “with the capacity to spill over into world markets causing risk aversion and lower asset prices.”
“DB is now getting the market’s attention but still doesn’t fully realize the potential problem,” the blog wrote in a Thursday post falling the stock’s selloff.