Frankfurt Optimism looks different: “I can’t deny that I’m worried about what’s in store for us in the next twelve months,” said Deutsche Bank boss Christian Sewing recently at an industry conference with a view to the economic situation in Germany. In fact, investors seem to share his skepticism: Since the high for the year in February, the stock has lost around 45 percent of its value, far more than the rest of the industry.
The main reason behind the massive losses is the fear of a deep economic crisis triggered by a gas supply stop in Russia. An event that Sewing believes will result in a severe recession, which in turn could mean a spike in loan defaults.
This fear affects all European banks. The industry index Stoxx Europe 600 Banks has lost 28 percent since February. However, the major domestic banks are suffering particularly badly because German industry is more dependent than many other countries on cheap energy imports from Russia.
“We see a deteriorating credit cycle for all German banks,” writes Morgan Stanley analyst Magdalena Stoklosa in a recent study. Only recently, Bundesbank board member Joachim Wuermeling warned the banks of the dangers of interest rate hikes, inflation and an impending economic crisis.
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>>Read here: Bundesbank board warns: “Do not underestimate the extent of the problems”
However, these concerns are unlikely to be reflected in the figures for the second quarter that the major German banks will be publishing in the coming weeks. On average, the analysts for Deutsche Bank, which will be presenting its interim results on July 27, are forecasting revenues of EUR 6.5 billion, after EUR 6.2 billion in the previous year.
Morgan-Stanley expert Stoklosa expects that the largest German money house was able to score points above all in its prime discipline, trading in bonds, foreign exchange and derivatives. On average, the analysts at the investment bank forecast a profit before taxes of around 890 million euros for the second quarter, which would be almost two-thirds of the bank’s total forecast pre-tax profit of almost 1.5 billion euros. The estimates for the net profit are 985 million euros after around 700 million in the previous year.
Higher credit risks threaten
“The figures for the second quarter will be decent, but the outlook for the rest of the year is really interesting,” says a major investor. “The bank will have to complete the final stretch of its restructuring in a much more difficult macroeconomic environment,” warns analyst Stoklosa. In view of the economic risks, it has raised its estimates for provisions for credit risks for this year by 25 percent to 1.1 billion euros. For 2023, Stoklosa has even more than doubled its estimate to around one billion euros.
CEO Sewing ordered Deutsche Bank to undergo a far-reaching restructuring in 2019 and promised investors a return on tangible equity of eight percent by the end of this year. On average, however, the analysts only consider a value of just over six percent to be realistic. “Given the bleak economic outlook, it wouldn’t be tragic if the bank just missed its target,” said one influential shareholder. However, Sewing must prove that the new business model can also be used in a crisis.
The situation at Commerzbank is similar. Analysts are expecting a decent second quarter, but fears about the future are spoiling investor sentiment. The stock has lost 40 percent of its value since February.
On average, the analysts at Commerzbank expect a profit of 293 million euros for the second quarter, after a loss of 527 million euros in the same period last year. CFO Bettina Orlopp was also optimistic at a Goldman Sachs finance conference in early June, but also pointed out the great uncertainty about an imminent gas supply stop.
“Our operational business is developing very well,” said Orlopp. Germany’s second largest private bank is therefore confident of making a profit of more than one billion euros in 2022 as planned. The risk provision for loans at risk of default should amount to less than 700 million euros.
The Frankfurt money house is threatened with new trouble at the Polish subsidiary M-Bank.
(Photo: Reuters)
“If the situation doesn’t worsen, we feel very comfortable with this number,” said Orlopp. “If there is a gas supply stop or a recession, that’s different, of course – then we have to adjust the numbers.” Since Commerzbank will not be presenting its half-yearly balance sheet until August 3, it would have the opportunity to increase its general risk provision if Russia were to stop gas supplies to Germany after the maintenance of the Nord Stream 1 Baltic Sea pipeline at the end of July.
Orlopp is also worried about the Polish subsidiary M-Bank. In the first quarter, thanks to the sharp rise in key interest rates in Poland, it was still mainly responsible for Commerzbank more than doubling its profit to EUR 298 million. In the second quarter, however, M-Bank now has to cope with unscheduled charges due to the expansion of the Polish deposit insurance scheme and contributions to a support fund for debtors in distress.
The institute would come under even more pressure if real estate buyers were given the right to temporarily suspend installment payments for loans due to high inflation. According to Orlopp, should a corresponding legislative proposal by the Polish government come into force, this would have serious consequences. “The additional profitability that banks have achieved at the moment because of the interest rate environment would, in principle, be completely skimmed off.” Whether Commerzbank will already make provisions for this threatening scenario in the second quarter will depend primarily on whether Polish President Andrzej Duda has signed the law by then or is asking for an amendment to be made.
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