As Deutsche Bank’s current sickness continues to set alarm bells ringing, the financial medics’ attention is focusing ever more closely on the health of the global banking system–and despite a small recovery in the German lender’s shares, the prognosis for the sector remains poor.
It’s not yet in intensive care, but a couple of weeks ago the McKinsey management consultancy highlighted a series of problems for the banking industry that have become increasingly relevant as Deutsche Bank’s true condition has become apparent to the financial markets’ monitors, News Market reported.
To recap, the US Department of Justice said recently that it may seek up to $14 billion in penalties from Deutsche Bank over mortgage-backed securities.
German Chancellor Angela Merkel has said that her government has no intention of providing the necessary medicine, and the bank’s chief executive, John Cryan, has said it doesn’t need it anyway.
Cryan reckons capital raising is still not a problem and has just emphasized the point by selling Abbey Life, the bank’s British insurance business, for $1.2 billion. Still, the eurozone’s rock-bottom interest rates, slow economic growth, weak profits and high costs could continue to delay a full recovery both for Deutsche Bank itself and for the sector more generally.
McKinsey’s analysis gives little ground for hope. “The inescapable reality is that the industry’s restructuring efforts to date have failed to produce sustainable performance. A more fundamental change is required, based on the realization that for most banks, the traditional model of global capital markets and investment banking is no longer an option,” it argues in a report entitled Time for Tough Choices and Bold Actions.
“Persistent and formidable headwinds continue to hinder CMIB [capital markets and investment banking] performance, including lackluster revenue growth, relentless waves of regulation, entrenched product complexity, new competition and increased uncertainty following the UK’s vote to leave the European Union,” the report’s authors continue.
Meanwhile, European stocks declined on the final day of the quarter as concern intensified about the health of Deutsche Bank AG.
The German lender sank 6% to a fresh record low, following losses in its US-listed shares, after some hedge funds moved to cut their exposure to it. Banks led declines among industry groups in the Stoxx Europe 600 Index, which dropped 1.5% in London. The benchmark’s down 2.2% this week, the most since June.
