Is Deutsche Bank the world’s greatest contrarian trade?

Matt Clinch
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Deutsche Bank
The total return for bank shareholders since the 1990s has been zero (Source: Getty)
ho'd invest in a German bank? A roller-coaster two weeks for Deutsche Bank, the country’s largest lender by assets, has only reinforced the volatile position the sector now finds itself in.

It’s highly likely that the top dogs at Deutsche will sweet-talk US regulators into reducing their $14bn settlement, but the bank is by no means out of the woods.

The bank’s liquidity is in great shape, analysts keep telling me, with the European Central Bank ready to offer cheap loans and solve any short-term funding problem. But it’s the perceived capital situation that worries many. This is the difference between the firm’s assets and its liabilities and acts as a financial buffer to absorb unexpected losses.

Jorg Eigendorf, head of communications and senior group director at Deutsche Bank, told CNBC the bank has a “comfortable cushion”. But presumably it would need to raise more capital to replenish reserves as well as dumping assets overboard. How easily could it do this when many are questioning its business model?

Let’s not forget, in July the bank announced second-quarter net income was down 98 per cent from the same period in the previous year. Profits are falling in an environment of little yield, thanks to the ultra-low rates from central bankers.

Read more: The new sick man of Europe is the continent’s entire banking sector

New safety buffers and litigation provisions that banks are required to hold cannot be helping. The rise of challenger banks must give executives at the established lenders sleepless nights and German consumers still view investment banking with distrust after the financial crash of 2008.

Deutsche Bank itself has even admitted that there’s a “perception issue” and analysts who delve deep into the financial figures of the bank have highlighted its large amount of so-called “level three” assets. These are assets that are highly illiquid and cause many headaches to the people trying to properly value them. In other words, they make analysts a little nervous.

So would you be part of any capital-raising plan that Deutsche Bank might announce in the coming months? Philipp Hildebrand, vice-chairman at fund manager BlackRock, noted last week that the total return for bank shareholders since the 1990s had been zero, according to Reuters, which also quoted Credit Suisse chief executive Tidjane Thiam suggesting that banks are generally “a bit difficult to invest in”.

But there are willing buyers out there. Gildas Surry, a senior analyst at Axiom Alternative Investments, told CNBC on Friday that there’s a lot of “overblown, overdone headlines on this topic”. Indeed, he said that the stock was actually a “screaming buy”.

Nonetheless, just two out of 33 Deutsche Bank analysts have a “buy” recommendation on its stock. The market, it seems, is as yet unconvinced. And like Citi suggested last month, European banks are now the “world’s biggest contrarian trade.”

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