Dangerous omens in Deutsche Bank's tumbling shares

Australian investors at the ADC Hayman Leadership Retreat were put on alert -- watch Deutsche Bank shares very closely.

In an environment where Germany’s economy is struggling, Deutsche Bank’s share price has been falling and is now priced at about 0.4 times its asset book value. At these levels the market is clearly nervous that the bank still has some nasty news to announce. Deutsche Bank raised €8.5 billion just over six weeks ago, including a five-for-18 issue to shareholders at €22.50. So far this year Deutsche Bank shares have fallen from around €38 to Friday’s level of €24.52, including a fall of almost 9 per cent in the last three weeks alone.

The group’s debt securities also started to come under pressure at the end of last week. The market fears that Deutsche Bank still has enormous quantities of securities of dubious value that have not yet been written down. But pressure from both the US and the European Central Bank is mounting. The market fears that the bank should have raised much more that €8.5bn to cover its problems.

Deutsche Bank is at the heart of the German economic recovery and Germany has been the one bright star in Europe, albeit the latest figures indicate a slowing economy -- a development that could threaten the euro if it continues.

Europe is looking to Germany to help the region out of its problems. But Germany will unlikely be able to help at all if it’s forced to rescue its own bank. Worst still, Deutsche Bank’s troubles have suddenly put focus on the potential problems of other global banks.

The Hayman Leadership Retreat was told that banks in the US, Canada, Australia, Taiwan and Korea are in good shape, but banking operations in Switzerland and Hong Kong have clear underlying difficulties that have yet to be fully recognised.

If the market is right and Deutsche Bank faces serious problems, there will be a ripple effect that will quickly and dramatically flow onto global stockmarkets.

Of course the latest weakness in Deutsche Bank may simply be another set of market nerves that amount to nothing. Everyone has to hope that is correct, but at Hayman there was a clear warning given.

One of the problems that many global banks face is that finally law enforcement officers are beginning to understand that smaller investors have been defrauded by large institutions being given preferential access to markets. In the US, class actions have emerged which could potentially result in enormous damages.

These legal manoeuvres come at just the wrong time for a number of the world's biggest banks. Small investors in Australia are also defrauded by the use of high-frequency trading, but the regulators have so far turned a blind eye.

If the global cases are successful, our regulators will be forced to act. Of course, the current bank nervousness is just one of the uncertainties that investors must face across the globe. Tensions in the Middle East and Ukraine are also of concern. But of course, as a result of the massive money-printing central banks have undertaken in recent years, the world is awash with liquidity, and that liquidity is driving up asset prices. I suspect that if there is pressure placed on big global banks they will be able to tap the enormous amount of liquidity in the global system to ensure they are rescued.

The world is much better placed to handle any crisis than it would have been, say, two or three years ago. Nevertheless, keeping a close eye on Deutsche Bank shares should be on every investor’s agenda.