ING & Deutsche Bank

Last week was full of concern about the banking & insurance industry with a falling Deutsche Bank and restructuring programs for ING and Commerzbank. LSM Mag offers a snapshot of the situation in The Weekly Review.

Belgian Review

As things seems getting from bad to worse in the banking industry, source claims that Dutch firm ING is about to present a worldwide restructuring plan. In Belgium, a strategic location for the bank, 3,000 to 4,000 jobs would be threatened. According the rumors, it’s today the program will be announced. If information revealed to be true, it won’t miss reminding the old debate of financial transfers from subsidiaries to headquarters. Indeed, ING Belgium has moved more than 7 billion € to the Dutch group in 10 years. Even more significant, dividends have reached 1.7 billion € in 2013 only and were still as high as 1.1 billion € last year. We remember strong criticism from labor unions to BNP Paribas Fortis some month ago about dividends paid by the Belgian branch to French HQ along with a 1,000 jobs cut plan. The scenario sounds familiar.

For the ING case, a strong rationalization is expected. Among 700+ agencies only 100 will remain, half of the workforce will be cut, and Record Bank—fully owned by ING Belgium—will be merged. However, ING plans to move owned agencies to franchises in order to reduce fixed costs. Then, a lot of jobs will simply move from a status to another and disappear from the bank’s payroll.

This strategic move comes with a digital disruption of the banking sector that reduces the need of the workforce, especially in administrative and technical units. Moreover, very low interest rates are strongly hurting margins. Other companies as Axa and P&V have already announced saving plans this month.

For the moment, there’s no sign of agitation for others Belgian banking giants like BNP Paribas Fortis, Belfius or KBC.

International Review

Far more worrying is the Deutsche Bank case. Indeed, rumors about bankruptcy have strongly risen up last days. Recurrently pointed out as a damaged institution last months, the German most powerful bank has lost no fewer than 46% in stock value since the beginning of the year. This week, the security has fallen under the symbolic level of €10 before increasing as reassuring information were released. Both directors and German authorities tried to calm down clients and investors and it seems very unlikely to see another Lehman moment happening. Rumors claims the bank owns more than €200billion in liquidity and despite denial by Chancellor Angela Merkel, German government would never let a major systemic bank sink.

Nevertheless, new European rules theoretically ban state intervention to save a failing bank, in order to protect taxpayers’ interests. Indeed, the widely used bail-out—Bear Stearns, Fannie Mae, Freddie Mac, Fortis, Dexia, etc.—has been replaced by a bail-in process. In other words, the help must firstly come from inside the bank—shareholders, debtors and lastly client accounts with more than €100,000 in balance. Then, if and only if this procedure is not enough government could consider a public saving plan. That’s the theory. In practice, bail-in has been used in 2013 to redeem major Cyprus banks and highly criticized by the population. More recently, Italian authorities asked for a freezing of the rule after the collapse of four small Italian banks whose shareholders and debtors were small savers—one of them committed suicide after losing €100,000 in the bail-in process. Prime Minister Matteo Renzi finally decided to intervene in order to avoid a political chaos. So, beyond the law, there’s a political reality that would probably lead to a significant state intervention if the situation requires it. A whale like Deutsche Bank remains “too big to fail” whatever the EU could rules.

Yet, there’s no place to be over-optimistic. Despite last week panic movement was primarily due to a record $14 billion fine inflicted by the American Department of Justice about RMBS transactions—finally negotiated at $5.4 billion by the group on Friday—the bank is currently involved in more than 8,000 lawsuits and encounters other severe issues such as undervalued “Coco bonds”—convertible bonds dedicated to raise the bank’s capital.

The heritage of the subprime crisis is very heavy for the German institution as its American subsidiary has been labelled “riskier bank in the world” by the FMI after failing stress tests. Its exposure to derivatives is simply out of mind: $42,000 billion — forty-two thousand billion. As much as the EU, USA and Chinese GDP together. More than half of the world GDP. In February, Pierre Béchade told BFM TV that any single issue in the derivative portfolio could be the end of the bank. And for the moment, everything’s quite fine in this side. In addition, operating activities are not very well. In July, reports stated that net income has plunged by 98%. The Group announced a large restructuring plan and seeks for cost cuts.

Things are pretty hot about the banking sector and this week will probably be another important cornerstone to determine what will happen in the near future. We haven’t ended to speak about Deutsche Bank.