Deutsche Bank Is Over-Leveraged
- By Holmes Osborne, CFA
Deutsche Bank (DB) has gotten itself into trouble by leveraging up its balance sheet. The company holds over $1 trillion in assets and only a sliver of that has to go bad to put the bank out of business.
Deutsche Bank has 1.38 billion shares and trades at a market cap of 15.74 billion euros ($17.78 billion). It takes $1.13 to buy one euro.
Warning! GuruFocus has detected 2 Warning Signs with DB. Click here to check it out.
The intrinsic value of DB
DB has 428.4 billion euros in loans as of the latest quarter. Its risk weighted assets are 402.2 billion euros and its Tier I Capital is 48 billion euros. The Tier I Equity Ratio is 10.8%. So if 48 billion euros of the 428.4 billion euros in loans go bad, the company is technically bankrupt. I could go further into detail on the balance sheet, but what's the point?
The book value per share is 44.54 euros. Since the shares are trading at 10.55 euros, it trades at a discount to book value by 76%. It seems the market does not put much faith in the book value of Deutsche Bank. S&P gives DB's long term debt a BBB+ rating. It gives its Tier II capacity to absorb problems a BB+ rating.
Global Markets (loans) accounts for 33% of sales, Corporate and Investment Banking 24%, Private Wealth and Commercial Clients 23%, Asset Management is 9% and Postbank (credit cards) is 11%. Geographically, DB's loan portfolio looks like this: Germany 26.6%, Europe 26.6%, 1.8% Eastern Europe, North America 32.7%, South America 1.4%, Asia 10% and then there are other regions.
What I would really like to do is try to get inside the black box of DB's loan portfolio. I don't think I will, but let's give it a try. At the end of 2015, DB showed 397 billion euros in loans. Of that, 195.1 billion euros were Corporate Banking and Securities, 80.3 billion euros in Private Banking and Business Loans (like Milton Drysdale making loans to the Beverly Hillbillies), Global Transactions 52 billion euros, Asset Management 23.8 billion euros (which I assume is margin but I could be wrong) and "Adjustments" 11.6 billion euros.
Here is what I find interesting. The Oil and Gas portfolio is 16 billion euros, of which 60% is investment grade rated. Metals and Mining is 10 billion euros, of which 35% is investment grade. Shipping is 7 billion euros. Brazil is 5.4 billion euros and China 10.1 billion euros. There is 13.3 billion euros in Italy, which seems to have its problems. There are billions and billions in derivatives: interest rate, currency, commodity, credit, etc. The assets are mind boggling: 196 billion euros in Trading Fixed Income and Equity, 515 billion euros in Derivatives, and 109 billion euros in other securities.
The chances of loss are incredible and it does not take much to put this company out of business. There's over 1 trillion euros in assets and only a small portion has to go bad. Could it spill into other banks? Who knows? Who knows anything about the derivatives book?
The U.S. Department of Justice has demanded $14 billion in fines over the mis-selling of mortgages. DB is fighting off the charges and states that it won't pay the fine. It's looking like the bank may have to do some type of secondary offering to shore up the balance sheet. This will surely dilute existing shareholders. According to Focus Magazine, unnamed government officials indicated that German Prime Minister Angela Merkel will not bail out DB. I have a hard time believing that.
DB has problems. The bank is over-leveraged. It does not take much to wipe out a bank with assets of this size. Billions in derivatives, loans, stocks, bond, mortgages, and on and on. I certainly would not try to bottom feed this company. Maybe if it got to $1 a share I would put in a few thousand dollars.
Disclosure: We do not own DB.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Signs with DB. Click here to check it out.
The intrinsic value of DB
