Deutsche Bank is one of the World’s richest bank and is based in Germany. The Bank is currently facing a monumental financial crisis that is threatening to throw the world into a new vista of economic turmoil.
You maybe wondering how this all affects Nigeria? Truth is whenever Western markets sneezes emerging or frontier economies like Nigeria catch pneumonia. Before we get to how it could affect Nigeria, let’s explain what exactly is wrong with Deutsche Bank culled from an article that first appeared on Bloomberg on September 26, 2016..
1. What’s worrying Deutsche Bank investors?
The U.S. Department of Justice requested $14 billion to settle claims that Deutsche Bank sold fraudulent mortgage-backed securities, or more than double the amount the company has set aside for litigation. While Deutsche Bank insisted it won’t pay anywhere near the amount requested, the surprisingly large figure heightened concern the lender’s mounting legal bills will force Cryan (CEO) to tap investors for fresh capital, or even seek a state rescue. Any settlement above 5.4 billion euros would imply a capital increase is needed just to pay the fine, according to Andrew Lim, an analyst at Societe Generale SA.
2. What does the German government say?
It’s “unimaginable” that the German state would support Deutsche Bank with taxpayer money because there would be a “public outcry,” said Hans Michelbach, a senior lawmaker in Chancellor Angela Merkel’s party bloc. Merkel has ruled out state aid for Deutsche Bank before national elections in September 2017, Focus magazine reported, citing unidentified government officials. Under new European Union rules, state bailouts of troubled banks should see shareholders and junior bondholders first suffer the loss of their investments.
3. What other options does Cryan have?
Cryan, in charge since last year, is already firing thousands of workers, dumping unprofitable clients and exiting businesses. A Deutsche Bank spokesman said Monday it hasn’t asked Merkel for assistance and that a capital increase is not on the agenda. Cryan might have to consider additional asset sales to pay for legal bills and bolster capital, say analysts.
4. What are the markets saying?
Deutsche Bank shares have dropped 53 percent this year, twice the decline in the Bloomberg Europe Banks and Financial Services Index of 38 companies — leaving the bank worth little more than the amount the DOJ requested. The cost to protect against Deutsche Bank defaulting on its senior debt climbed the most in about three months to more than twice its 10-year average. Deutsche Bank’s 1.75 billion euros of 6 percent additional Tier 1 bonds, the first notes to take losses in a crisis, are close to a seven-month low.
5. Why is Deutsche Bank so important?
The lender has assets of about 1.8 trillion euros, equivalent to more than half the size of the German economy, and operates Europe’s largest investment bank. The International Monetary Fund said in June that Deutsche Bank’s connections to other lenders may make it the single biggest contributor to systemic risk among global banks.
6. Would it be Europe’s Lehman moment if it were to fail?
The collapse of Lehman Brothers Holdings Inc. in September of 2008 — after top U.S. officials decided against a bailout — led to a drastic deepening of the global finance crisis. “You can’t compare Deutsche Bank with Lehman,” said Michelbach, the German lawmaker. “The bank is in a position to get out of this situation on its own.” Allianz Global Investors AG Chief Investment Officer Andreas Utermann, in an interview, said the German government will have to bail out Deutsche Bank if its financial situation gets bad enough. “It’s too important for the German economy,” he said.
How could it affect Nigeria
The last time the world faced a similar crisis was in 2008, when Lehman Brothers collapsed and sent the world into the great recession. Nigeria was for a year or two immune from this collapse as we had stronger reserves and very little external loans. Nigeria at the time wasn’t exactly connected to the world markets as it currently is and when it finally affected Nigeria, it was triggered by a stock market crash was caused by margin loans.
If Deutsche Bank was to be a another Lehman, then we doubt Nigeria will escape a negative impact. Why do we say so?
External Reserves – Nigeria’s external reserves is currently around $24 billion. One of the negative effects of the 2008 economic crisis was that oil prices dropped to below $50 (from an all time high of $145 just a few months earlier). At the time Lehman happened in 2008, Nigeria’s external reserve was about $68 billion. That gave us enough buffer to weather the storm while the big economies of the world proffer a solution. However, with our external reserves currently at $ 24 billion, Nigeria lacks enough buffer to navigate through any economic turmoil, especially as oil prices remain below $50.
Investor Apathy – One of the major focus areas for getting Nigeria out of the current recession is putting forwards financial products that can attract foreign investors and get the to bring in dollars. For example, the CBN MPR hike to 14% has increased yields to about 17%, in the hope that higher interest rates will attract foreign investors who might be enticed at buying our bonds and investing in our equities market. Without foreign investors returning into Nigeria it will almost be impossible for Nigeria to find a temporal solution to our foreign crisis which is a major factor for chronic depreciation of the naira as well as the current recession. The stock market could also be significantly affected as more investors will liquidate their holdings to the safety of the dollar. With another economic crisis unfolding, it seems now more unlikely that anyone will want to invest in any frontier economy let alone Nigeria, leaving us in a far more precarious situation.
Lower demand – As Nigeria strives to dig itself out of a recession, it hopes that global demand will bounce back on an upward trajectory stimulating an increase in commodity prices. Nigeria is a commodity based economy with oil as its major export. We are also looking at exploring our vast mineral resources as a way to get us out of relying only on oil. However, investment in these sectors depend largely on available and growing demand. An economic crisis caused by a bank as large as Deutsche could likely trigger a bank run leaving investors scampering to the safety of US bonds. If that happens then no one will be investing thus dampening demand leaving us with fewer buyer for our oil and killing off any hopes of attracting foreign investments in our mining sector.
Financial Sector – Since the fall in oil prices began in late 2014, Nigeria’s commercial banks have seen core revenues drop and non-performing loans increase. Some have only survived due to exchange rate gains and shenanigans. However, they face a potential risk down the line if they need to refinance some of their foreign loans or get new ones. With some mid tier banks said to be in poor financial health, it is highly likely that they will not be able to attract or close out on some of the fund raising activities they have lined up for the last quarter of this year and early next year.
Dollarization – Nigeria’s forex situation is also likely to continue to be at risk if the world is faced with another economic turmoil. Once investors start to fly to the safety of US bonds, asset prices will decrease considerably leaving the naira more worthless. More Nigerians could then start to flee to the safety of the US dollars, further depreciating the naira.
These are all pessimistic views which we believe may not materialize. The world is certainly not ready for another economic crisis and it is likely that the Deutsche Bank will survive this. Worst case, they will be bailed out by the German Government or European Bank.
This however, shows how urgent and critical it is for Nigeria to claw its way out of this economic mess.