SA investors have entrusted more than R16bn to Deutsche Bank’s exchange-traded funds (ETFs) and exchange-traded notes (ETNs). With the beleaguered German bank teetering on the edge of financial catastrophe, they are rightly asking: is my investment still safe?
"I am being inundated by calls from concerned retail investors," says Mike Brown, MD of etfSA.
The news is good for investors in Deutsche Bank’s five JSE-listed ETFs. Their money — all R11.8bn of it — is as secure as the gold in Fort Knox. Deutsche Bank can’t access one cent of it.
ETFs fall under the Collective Investment Schemes Control Act, which requires all assets to be entrusted to an independent trustee for safekeeping. Standard Bank acts as Deutsche Bank’s trustee in SA.
"If something were to happen to Deutsche Bank, ETF trustees would ensure they continue to function as normal," says Brown.
Investors in the three JSE-listed Deutsche Bank ETNs are regrettably not in the same sleep-easy situation . "They are listed notes and carry the full credit risk of the issuer," says Chris Edmeston, product accountant at Deutsche Bank.
It’s a sobering thought. ETNs are backed by no more than their issuer’s promise to deliver investors the value of an underlying index or commodity less costs. This is all the SA investors with R4.2bn tied up in Deutsche Bank ETNs have to rely on.
ETN investors will have to weigh up the risk of Deutsche Bank caving in financially. The bank’s share price tells a sad story, having fallen by more than 50% this year to €13. In 2009 it stood at €130.
Profits are also proving elusive: in 2015 the bank reported a net loss of €6.8bn. It was little better in the second quarter of 2016. Revenue slumped 20%, while an €18m net profit was down from €796m in the same period in 2015. The bank also continued to shed deposits.
Deutsche Bank is now locked in a radical restructuring process that includes shedding 15,000 jobs and jettisoning assets. Far more drastic action may be needed, the bank’s CEO, John Cryan, has conceded.
Its problems extend way beyond operational issues. Costly financial skeletons are falling out of its closet.
The bank coughed up €2bn in litigation costs in 2014 and €5.2bn in 2015. To cover the 7,000 legal cases it still faces, it has set aside another €5.5bn. This includes about €1.2bn to cover a potential fine flowing from US$10bn in dodgy Russia-related trading.
But a €5.5bn litigation reserve looks like a drop in the ocean. A $14bn penalty has just been slapped on the bank by the US department of justice for mis-selling residential mortgage-backed securities in the "anything-goes" pre-2008 period.
The question now asked is: will Deutsche Bank be allowed to fail? The jury is still out on its fate. Ominously, German chancellor Angela Merkel has ruled out a bailout of the country’s biggest bank.
It may just be political hot air. The bank is a crucial part of Germany’s economy and is systemically intertwined with every other major global bank.