What's up guys and welcome back to wall street millennial today we're doing a video about the epic rise and fall of the german financial institution, deutsche bank, headquartered in frankfurt, germany, deutsche bank was once one of the most prestigious investment and commercial banks in the world. In 2007, deutsche bank stock reached a high of 126 dollars, giving it a market cap of 75 billion dollars as of 2021. The share price has fallen 90 percent to just 13 a share. During the same period.

The s p 500 has increased by 184 percent. The tax index, which is the german equivalent of the dow jones industrial average, increased 110 at the same time. Needless to say, the last 15 years have been a disaster for anyone unfortunate enough to have invested in deutsche bank in this video we'll take a deep dive into what went wrong at deutsche bank and how such a mighty financial behemoth could fail. So spectacularly deutsche pink is one of the oldest banks still in operation.

Today it was founded in 1870 in the kingdom of prussia, which is now part of modern day. Germany, from its very founding deutsche pink, was an internationally oriented organization. Its founding mandate was to promote and facilitate trade relations between prussia, other european countries and overseas markets. They almost immediately started to expand globally with branches in britain, shanghai and the americas.

By the early 1900s. They were financing major industrial projects, including the northern pacific, railroad in the u.s. In 1926, they entered the investment banking business, facilitating the merger between german car manufacturers, daimler and benz. The nazi rule of germany represented a dark spot in deutsche bank's history.

They helped the german government fund the auschwitz concentration camp after the war. They were eventually pressured into supporting a 5.3 billion compensation fund for the victims. In the post-war period. The bank grew rapidly through mergers and acquisitions.

They hired former executives from merrill lynch to build out their capital markets operations where they transact financial securities on behalf of hedge funds and other institutional clients, their management team was incredibly savvy with their acquisitions, often buying out smaller competitors at cheap prices during distressed situations. For example, during the russian rumble crisis of 1998 american investment and commercial bank bankers, trust was invested heavily in russian debt when the value of these russian assets, taint, anker's trust, was pushed to the brink of bankruptcy. Deutsche bank took advantage of this situation and acquired the distressed company for 10 billion, a steep discount to its value just a year earlier. This allowed them to increase their footprint within the u.s investment banking sector.

Through its numerous international acquisitions, deutsche bank turned itself into one of the world's premier commercial and investment banks by the early 2000s, putting it on par with the likes of goldman sachs and jp morgan. Leading up to the financial crisis of 2008, deutsche bank was heavily involved in the selling of mortgage-backed securities and cdos during the inflation of the housing and credit bubble from 2004 to 2008, they created about 32 billion dollars worth of cdos, which they sold to their clients. When the housing bubble burst, they had some bad loans on their books, which had to be written down. The general slowdown in economic activity also decreased their investment making in lending revenues.

In 2008, they reported their first annual loss in more than 50 years. While this was a major hit, they managed to survive the period without the need for a government bailout and the stock recovered most of its losses in the following years. But the german bank's troubles were far from over. In 2012, many euro-zone countries had unsustainable debt burdens which necessitated draconian cuts to government expenditures.

Deutsche bank had major operations in italy and spain, with 18 billion and 12 billion euros worth of credit risk in the two countries respectively. In mid-2012, deutsche bank was forced to write down the value of its european sovereign debt holdings as default risk. Increased aids, including deutsche bank, employ fractional reserve lending. They take deposits from customers and lend out most of it to borrowers the amount of customer deposits that they keep in liquid assets is called the equity ratio.

The european banking authority requires this equity ratio to be at least 12 and a half percent deutsche bank held european sovereign debt on their books, which they used to make their capital ratio requirements. As the value of this debt decreased, their equity ratio fell below the required level to remedy the situation, the european banking authority required them to raise 1.2 billion euros of stock. While this diluted the common equity value, it allowed them to exit the european sovereign debt crisis. In a strong financial position, while deutsche bank is an international financial institution, their revenue mix has been historically and still is dominated by europe.

As of 2013, germany made up 36 of their revenue and 47 of their employees. The uk made up fifteen percent of the revenue in eight percent of the employees. The two countries combined make up the majority of both revenue and cost basis. As you can see from this graph, both countries experience economic stagnation over the past 10 years with the gdp per capita staying roughly constant.

Despite large year-to-year fluctuations, there was no single event responsible for the german bank's decline. Their fall from grace was a long, slow, bleed caused by the economic stagnation in its key european markets. In 2014, the german economy entered a recession with exports plunging the recession can largely be blamed on overly conservative fiscal policy. During the global financial crisis of 2008, germany implemented economic stimulus plans resulting in a sovereign debt to gdp figure of 82 at the peak in 2010., and almost every year after this, they ran large budget surpluses and their debt to gdp ratio has reduced to just 60.

As of 2019, it's generally considered a good thing to reduce public debt, as it decreases, interest expense and frees up capital for the private sector. However, german chancellor angela merkel's myopic obsession with debt reduction is widely considered to be overly conservative. While she was successful in reducing the public debt burning, this only came at the price of a very high cost to achieve budget surpluses. The government cut back on public infrastructure programs such as roads and bridges.

If a public project can develop an economic return in excess of the government's interest rate, it is optimal to fund the project, even if the government must borrow money to do this running. A budget surplus also requires charging high taxes. Germany has one of the highest tax burdens in the world with their corporate tax rate increasing to 30 in 2018.. When corporations have high tax rates, they have less money left over to invest in new projects.

The after-tax return of new investments also decreases a project with a positive net. Present value at a low tax rate may have a negative net present value at a higher tax rate. These factors cause a widespread lack of investment in industrial capacity causing output to stagnate. Furthermore, increasing composition from low-cost automakers in asia and latin america decrease the competitiveness of german exports.

This is a major problem, because germany's economy is highly dependent on exports, which make up more than 40 percent of total output. The stagnation of the economy had devastating consequences, both for deutsche bank's commercial and investment making operations. The commercial bank makes money by originating loans to businesses and individuals. Businesses only need loans when they are investing in new large projects, such as a new factory or research and development with the german economy.

Stagnating demand for loans was very weak. The lack of loan demand translates to lower bond yields. Government bond yields are determined by a supply and demand relationship. You can think of it as a fixed amount of capital in the economy competing for investment opportunities, as loan demand decreases, there are less investment opportunities and thus their prices get bid up.

This translates to lower yields on all debt. The interest rate of the 10-year german government bomb decreased from 4 in 2008 to negative 0.17 today, while some of this can be attributed to manipulation by the european central bank. Most of it is the result of weak demand for loans in the economy. Low interest rates are a disaster for deutsche bank.

Their commercial banking operations make money by providing loans as interest rates go down. The net interest margin that they make on these loans also decreases. This puts pressure on their revenue in profitability. The stagnation in the economy also decreases the number of ipos and m a transactions.

This puts pressure on deutsche bank's investment, banking and capital markets operations. In 2015, deutsche bank shocked its investors by reporting a 6 billion euro loss. While analysts had been expecting a 1 billion euro profit, part of the loss could be attributed to write, downs and legal settlements, including 2.5 billion dollars of fines that they had to pay for their roles in a libor manipulation scandal. However, it was clear that the profitability of their core businesses was declining newly appointed ceo, john cryan promised to implement a sweeping restructuring effort to bring the company back to profitability.

One of his first initiatives was to lay off 23 000 employees or roughly 25 of their global workforce. They also announced that they would suspend their dividend for 2015 and 2016.. This was a significant move, as they had paid a dividend every single year for the past 50 years, even including 2008 and 2009.. The fact that they were cutting the dividend now indicated senior management knew that things were getting really bad and things wouldn't get better.

Any time soon they reported three consecutive years of net losses in 2015, 2016 and 2017., while they were able to eke out a net profit of 341 million euros in 2018, they swung back to a 5.2 billion euro loss in 2019.. The cost cuts enacted by ceo, john kryon were a double-edged sword. While they were successful in reducing the bank's bloated cost base, they also resulted in sharp revenue declines. This is painfully apparent in their non-interest revenue, which consists of investment, banking fees, trading commissions and trading gains.

In 2015, non-interest income was almost 18 billion euros in 2019. It was almost cut in half to just 9.8 billion euros. This decline was so dramatic that deutsche bank continued to post net losses, despite cutting billions from their cost base. Deutsche bank's draconian job cuts made its investment making and trading operations less competitive with less bankers and traders.

They had less expertise and weren't able to provide as good of a service to their clients. Their history of job cuts also made it difficult to recruit top talent. With the lack of job security, deutsche bank became less desirable of a place to work. This made it difficult for them to recruit high-ranking industry professionals.

The brain drain at deutsche bank made it increasingly difficult for them to compete with the large american and british investment banks. John krein's legacy as ceo of deutsche bank was a complete disaster with the stock price declining more than 50 percent during his tenure in april of 2018, the board of directors lost confidence in crying and replaced him with christian suing suing was given the monumental task of Bringing the bank back to profitability instead of trying to increase their competitive position. He instead decided that they should do even more cost cuts at the investment banking division. They considered a merger with fellow german bank commerce bank, but after just a few months of negotiations, the deal was scrapped.

Both banks decided the risks and costs involved in entering the two massive companies would outweigh the potential benefits with the potential merger talks abandoned suing continued. His predecessor's strategy of deep cost cuts in an attempt to improve profitability. He announced 18 000 job cuts, which amounted to 20 of the bank's remaining global workforce. These cuts include entire teams of equity traders in europe, the us and asia for the full year of 2020.

Deutsche bank posted a net profit attributable to shareholders of 113 million euros compared to a loss of more than 5 billion euros in 2019.. Their non-interest income increased dramatically. This offset the negative impact of higher credit loss provisions for their commercial bank. Their trading operations benefited from increased market volatility as market conditions stabilized in 2021.

It's unlikely that this growth in non-interest income can be sustained. Its annual profit helped george being stock more than double from its pandemic lows in march of 2020.. Despite this rally, it is still down roughly 90 from its all-time highs. The bank's outlook is highly uncertain, but there are at least some glimmers of hope.

The german government expects robust gdp growth of 3.5 percent in 2021, led by pent-up consumer demand. This could increase loan demand in interest rates. However, germany faces an aging population which represents a long-term headwind for economic growth. Their investment banking operations still face a lack of competitiveness relative to their competitors.

Ceo christian suing certainly has his work cut out for him. Alright guys that wraps it up for this video, do you think deutschman can make a comeback? Let us know what you think in the comment section below as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.