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Bear of the Day

Headquartered in Frankfurt, Deutsche Bank (DB) is the largest bank in Germany and one of the largest financial institutions in Europe and the world, with assets totaling €1.74 trillion as of Mar 31, 2016. It offers a wide variety of investment, financial and related products and services to private individuals, corporate entities and institutional clients around the world. 
 
$14 Billion Penalty for Mortgage Practices
 
Last week, it was reported that the US Department of Justice had proposed a $14 billion settlement to resolve claims related to the German bank’s dealings in mortgage-backed securities prior to the financial crisis.
 
While the bank confirmed the report, they said “the Bank has no intent to settle these potential civil claims anywhere near the number cited”, according to a WSJ report. While it is unclear as of now as to how much fine will eventually be paid by the bank, analysts say even a settlement half the proposed amount would strain the bank’s capital cushion.
 
The bank has a litigation reserve of only about $6.2 billion and may be forced to raise fresh capital. Shares plunged more than 8% after the report.
 
Disappointing Second Quarter Results
 
Deutsche Bank reported net income of €20 million ($22.6 million) for Q2, while income before income taxes was €408 million ($460.7 million), down 66.8% year over year.

Lower revenues and higher provisions hurt the results, partly offset by the reduction in non-interest expenses.
 
Falling Estimates
 
Germany’s flagship bank has seen a sharp plunge in earnings estimates as a result of weak performance and continued woes.
 
Zacks Consensus Estimates for the current and next year EPS are now $0.40 and $2.03 respectively down from $1.38 and $2.21, just 60 days ago.
 
The following chart shows negative earnings and price momentum:


 
IMF and Fed Rebuke
 
In statement released after in its annual review of the stability of the German financial sector, the IMF said that among globally important banks, Deutsche, which is highly interconnected with other financial institutions due to its investment and transaction banking units, “appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse.”
 
Earlier the Federal Reserve cleared capital plans of 31 out of 33 big US banks after stress tests. These banks can now increase their dividend payouts and share buybacks. The US units of Deutsche Bank and Santander Bank were the only banks that failed the test.
 
Brexit Woes
 
European banks have a strong presence in London and their cross border trading and clearing operations could also suffer if Britain leaves the union. 
 
The Bottom Line
 
After strict regulatory norms imposed on big banks, they have been finding it difficult to generate profits in their investment banking and trading businesses. Rising market volatility has also impacted their traditional businesses. Further continued low interest rates have hurt their lending profitability.
 
Last year, Deutsche had announced lay-offs and restructuring but the bank continue to struggle. While shares may recover slightly after a very sharp plunge last week, the overall outlook for the bank remains very uncertain and it is safer to avoid the stock for the time being.
 
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