Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

It's been a horrible year for Deutsche Bank. Its stock has crashed. Its staff is demoralized. Its prospects have dimmed further in the wake of the U.K.'s vote to exit the European Union.

And the pain is only poised to deepen, at least if you believe bond traders.

If you want to get a sense of how little faith debt investors have in the German lender's future, just take a look at the firm's contingent capital, or CoCo, bonds. Prices on its 6 percent notes, for example, have plunged more than 7 percent in the past five trading days to 75.8 euro cents, from as high as 92.8 cents at the start of the year.

Bond Blues
Traders have been heavily selling Deutsche Bank's contingent capital bonds
Source: Bloomberg

Deutsche Bank has been the biggest loser so far this month among the 50 largest CoCo issuers, according to Bank of America Merrill Lynch index data.

Price Pain
Deutsche Bank's risky bonds have been the most punished this month among the largest lenders
Source: The BofA Merrill Lynch Contingent Capital Index


In contrast, across the entire CoCo market, prices have actually risen so far this month, on average, according to the same index.

CoCo bonds are a cross between stocks and bonds designed to help banks absorb unexpected losses. If a bank fails to meet requirements for how much capital it must have relative to its assets, then it can suspend interest payments on these bonds. If the firm's finances worsen further, then it can foist losses on bondholders, or even avoid paying them back at all.

The fact that Deutsche Bank's CoCo bonds have fallen so much suggests debt investors think it won't have enough capital in upcoming years to meet regulatory requirements. It also implies the bank's assets are worth less than their current book values.

Here's the problem as debt traders see it: The German lender must generate up to 2.5 billion euros of capital by the end of 2019 to meet requirements at a time when it's struggling to boost revenue. This feat appears even more challenging now that Britain has voted to exit the European Union, as the move will likely curtail finance industry revenue more generally.

Deutsche Bank's chief executive, John Cryan, thinks this hurdle is no big deal. "We don't see a problem there," Cryan told the German Der Spiegel magazine this month. “There is no question of a capital increase at the moment.”

Perhaps Cryan doesn't see a problem, but traders do. Deutsche Bank's stock is trading at one of the lowest prices relative to book value among its European peers, according to Bloomberg Intelligence, suggesting it will experience more losses and perhaps be forced to raise more money in equity markets.

Sinking Stock
Deutsche Bank's shares have plunged 47 percent so far this year
Source: Bloomberg


It's unlikely regulators will ease up their scrutiny of Deutsche Bank and its adherence to capital requirements aimed at reducing another banking collapse.  The firm may be the biggest contributor to systemic risk among the biggest banks, the International Monetary Fund said last month

The latest plunge in Deutsche Bank's CoCo bonds underscores the fear among investors of an even more difficult few years ahead. Unless the lender acknowledges their concerns and comes up with a concrete and realistic plan to address them, it's hard to see how the notes will meaningfully rebound anytime soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net