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Deutsche Bank’s new-found momentum is unlikely to last

A few good months for the German lender does not add up to turnaround

It is more than a decade since Deutsche Bank’s glory days, when an investment bank that appeared to rival Wall Street’s finest was rewarded with a surging share price. The 2008 financial crisis and the regulatory changes that followed it proved that many big banks — and Deutsche possibly most of all — had feeble foundations. The German lender has not made an annual profit for shareholders since 2014.

This year, the Covid-19 crisis has wreaked havoc on the global economy and further dented banks’ prospects. And yet Deutsche’s fortunes over the past few months have taken a sharp turn for the better. Were doubters wrong to write the bank off?

Consider exhibit one: a surprising quarterly profit.

In April, the bank reported net earnings of €66m for the first three months of the year. Hardly stellar, but enough of a shock — compared with analyst expectations of a steep loss — that its shares jumped by more than 10 per cent.

That sunny sentiment was clouded a bit when it seemed that Deutsche’s ambitious restructuring plan had been thrown into doubt by an inability to cut jobs as planned amid the pandemic, and because loan losses would be far higher than forecast. But this was not enough to dispel the positive mood.

Which takes us to exhibit two: a thriving share price. 

European stocks in general have had a decent run in recent weeks, albeit from a low base. The Stoxx Europe 600 index rose nearly 3 per cent in June, outpacing the S&P 500, as bullishness on US equities faded. In part this was unsurprising after such a run-up in US valuations in previous weeks, but there is also mounting concern about the Trump administration’s handling of coronavirus and new spikes across the country.

At the same time, a sharp decline in infection rates in Europe has fed optimism among investors. They have also been encouraged by the European Central Bank’s credible response to the crisis and hopes that Angela Merkel, the German chancellor, can galvanise a transformative €750bn eurozone recovery fund.

European lenders have had a better time, too. The Euro Stoxx Banks index has rallied about 30 per cent since the depths of the crisis in mid-March, easily outperforming US bank stocks.

Notwithstanding such buoyant performance overall, Deutsche’s stock bounce after those first-quarter results stood out. True, the bank’s valuation remains pitiful: its price-to-book ratio — a common valuation measure which compares a company’s market value to that of its net assets — stands at just 0.3 times. Wall Street rivals trade close to parity with their book values.

Still, Deutsche’s shares have rebounded nearly 75 per cent since their March low, significantly outstripping those of its European peers.

Exhibit three: the latest episode in the Wirecard saga.

As recently as mid-June, the payments provider had boasted a stock market valuation of nearly €13bn, despite 18 months of Financial Times reporting about suspected fraud at its core. Towards the end of last year, according to a report by Bloomberg, the German payments group had even talked to Deutsche about a deal that would have subsumed the once world-topping lender (Wirecard's market cap exceeded Deutsche’s for long periods in 2019).

That gall has at least been stymied. Following its catastrophic fall from grace and collapse into insolvency at the end of last month, Wirecard has been forced to appoint administrators to hawk its assets to anyone who might buy them. With bittersweet irony, the perennially weak Deutsche has been asked to rescue Wirecard Bank, the defunct group’s lending unit. 

It is hardly the kind of boost that would rekindle memories of 2007, when Deutsche was briefly the world’s biggest bank by assets. These days, the challenge is more about overturning past humiliations.

Sadly for Christian Sewing, Deutsche’s valiant chief executive, a few relatively happy months does not make for a positive outlook.

It is hard to see how the bank can hit its cost savings target, despite management assurances, given that restructuring efforts were paused during the pandemic lockdown. The bank appears to have taken a far from conservative approach to provisioning for prospective loan losses — it has set aside a fraction of the amount peers did. And its original plan and profit projection gave it little scope for setbacks, let alone a global economic crash. Second-quarter results later this month will be telling.

Deutsche turned 150 in March, amid very muted celebrations. Little wonder.

Hedge fund launches dry up in tough markets

Just 84 funds got going in the first quarter, while 304 were liquidated

The coronavirus crisis has made life even tougher for start-up hedge funds around the world.

While some of the biggest names in the industry, such as DE Shaw and Baupost, have been able to take in investor assets during the crisis, some smaller names and new launches are struggling to gain investors’ attention.

In many cases, investors have stuck with well-known funds rather than taking a chance on a market entrant. Pitching a fund to investors by video conference has not been an easy sell.

Just 84 hedge funds launched in the first three months of this year, according to data firm HFR — the lowest quarterly total since the depths of the financial crisis in late 2008. Meanwhile, 304 funds were liquidated, which was the second-longest casualty list since the crisis.

“As the [first quarter] devolved into an unprecedented financial market panic and risk tolerance plunged to unprecedented lows, it is not surprising that [hedge fund] launches fell to a near historical low or that liquidations rose to a five-year high,” said Ken Heinz, president of HFR.

Investors have also felt less compelled to consider new opportunities when many large, established funds have performed well.

Funds with more than $5bn in assets limited losses better in March than smaller firms, according to Aurum Research. Well-known names such as Millennium Management, Citadel Advisors and Balyasny Asset Management are among those to chalk up double-digit gains in the first half of the year.

However, some expect launches to pick up soon.

Peter Greene, vice-chair of law firm Lowenstein Sandler’s investment management group, said that while some debuts might have been delayed because of the pandemic, he did not expect the market for “well-pedigreed managers” to be affected by coronavirus.

Court ruling ties SEC’s hands over investor fraud

New restrictions on regulator’s power to force fraudsters to repay illegal gains will affect victims of insider trading

US regulators face new restrictions on their powers to force fraudsters to repay illegal gains after a Supreme Court ruling that will affect victims of insider trading, market manipulation and accounting fraud.

The Securities and Exchange Commission wins disgorgement orders — repayments from wrongdoers — worth more than a billion dollars a year from federal courts. The SEC can also impose fines as punishment.

The Supreme Court ruled in a case known as Liu vs SEC that the regulator should return disgorged funds to investors that have suffered harm rather than send this money to the US Treasury.

Identifying victims that have been directly harmed can be difficult, particularly if they are individual investors in pooled vehicles, such as mutual funds, affected by scams including insider trading. 

“The impact on disgorgement in insider trading cases, in particular, will be hotly debated. Victims of insider trading are typically difficult to identify and thus unlikely to receive any disgorgement award that the SEC distributes,” said Charles Clark, a partner at the lawyers Schulte Roth & Zabel.

New avenues for defendants to challenge cases brought by the SEC have been opened by the Supreme Court, which ruled that disgorgement awards should not exceed a wrongdoer’s net profits. Legitimate business expenses must be deducted from any repayments. But the question of when business expenses are “legitimate” remains unclear and will be contested in future cases brought by the SEC.

In addition, a defendant cannot be held liable for any trading profits earned illegally by others. This raises questions about so-called “tipper-tippee” relationships, where a defendant has passed on sensitive information but did not profit directly from unlawful behaviour.

“The Liu ruling will fundamentally reshape the amount the SEC can obtain as disgorgement in enforcement actions,” said Mr Clarke, who led the investigation into the Enron scandal as a senior member of the SEC’s division of enforcement.

Anthony Kelly, a partner at Dechert, said the SEC would “need to rethink” its approach if it was no longer able to send money to the Treasury or to clearly identify wronged investors.

“There are questions if a victim even exists in cases involving insider trading or the foreign corrupt practices act,” said Mr Kelly.

One remedy might involve paying any disgorgements to an investment fund or the manager of a pooled vehicle.

“If the offence happened in the past, this approach raises the question of whether newer investors are receiving a windfall payment instead of the victims being compensated,” said Mr Kelly, a former co-chief of the SEC enforcement division’s asset management unit.

The SEC also uses disgorgement awards to pay whistleblowers that help the regulator to investigate crimes. It has paid more than $500m to whistleblowers but the Supreme Court ruling casts doubt over whether these awards benefit wronged investors.

“It would be a blow to the SEC if it lost the ability to use disgorged funds to issue awards designed to create financial incentives for whistleblowers to come forward,” said Susan Hurd of Alston & Bird.

Bankers warn corporate clients to expect resurgence in activist attacks

Advisers predict campaigns will get going after companies release second-quarter results

Bankers have urged their corporate clients to brace themselves for an onslaught from activist investors, as many hedge funds that kept a low profile in the early stages of the coronavirus pandemic start to agitate for change.

The Covid-19 crisis has shown up flaws in many companies’ business models and pushed down their share prices, making them more vulnerable to external pressure, advisers have warned.

Darren Novak, head of activist defence at UBS, said there was a “tremendous” amount of activism after the 2008 financial crisis and he expected 2021 to be another busy year. These moves could start in the coming weeks, he said.

“Activists are waiting for second-quarter results to come out to see which companies are most vulnerable. That will be just the beginning of the wave,” Mr Novak added.

Activist campaigns stalled in the first half of 2020 after some hedge funds held back from making public moves due to the potential reputational risks of acting aggressively during a global crisis.

Worldwide, 522 companies were subjected to public campaigns in the first six months of the year, compared with 628 in the same period last year, according to Activist Insight, a data compiler. That makes it the quietest start to a year since 2015.

Edward Bramson’s Sherborne Investors was one of the highest profile investment managers to suspend campaigning when it announced in April that it would not vote against Barclays chief executive Jes Staley’s reappointment at the bank’s shareholder meeting, due to the “complexity of the management situation” during the coronavirus crisis.

David Hunker, head of shareholder activism defence at JPMorgan, said clients whose share prices had dropped significantly were busy preparing their defences. Disappointing second-quarter profits, or a surge in Covid-19 infections, could create an opportunity for activists, he said, adding: “It will be more difficult for companies to defend themselves.”

UBS has developed a tool for its clients that uses machine learning to analyse financial data from more than 5,000 historical campaigns in order to identify which companies are most at risk of being attacked. “The tool analyses everything we can measure — it is trying to mimic the activist’s brain,” said Mr Novak.

Other activist defence tools offered by banks such as JPMorgan analyse a company’s shareholder base to assess how likely they are to respond to a campaign.

Pamela Codo-Lotti, head of cross-markets activism and shareholder advisory at Goldman Sachs, said she expected private discussions taking place between activists and companies to go public in the coming months.

“Since June there’s been a bit of change in psychology,” she said. “There have been a few campaigns and we’re hearing a lot of noise at the moment.”

Spanish renewables specialist bets sector will boom as EU pumps funds into crisis recovery

Iberdrola plans to invest at record levels in coming years, as it touts the crisis recovery as a once-in-a generation opportunity for the energy sector to transform itself.

The clean energy specialist, Spain’s second-biggest listed company, is carrying out €10bn of investment in 2020 — a level Ignacio Galán, chairman and chief executive, said it planned to maintain after this year.

“Over the past years, we have been investing an average of around €5bn, €6bn; this year we are going to invest €10bn . . . in more renewables and accelerating the construction of networks,” said Mr Galán, who has headed the company for 19 years.

“It will not be very different in the coming years . . . we will be at these levels ,” he told the Financial Times. “We are in a good sector at a good time.”

The Iberdrola boss argued that the clean energy sector stood to be among the beneficiaries of a €750bn EU coronavirus recovery fund proposed by the European Commission, which the bloc’s leaders will debate at a summit next week.

“Everyone wants to get out of the economic crisis as quickly as possible and look for sectors that can speedily generate jobs and make the economy more competitive and sustainable,” he said. “And there are two sectors that provide that and are already priorities: the [EU’s] Green Deal and digitalisation, and our sector is involved in both.”

He added that electricity networks needed to be more digitalised and efficient, arguing that the crisis provided an additional reason to speed up the EU’s goals to cut carbon emissions to roughly 60 per cent of 1990 levels by 2030. “If we could accelerate the national energy and climate plans in Europe we could create around 2m jobs across the continent by 2025,” he said. 

Although the European Green Deal envisages total public and private investment of at least €1tn, he added that he did not expect problems for the energy sector in raising the vast sums needed. 

“In our sector at present, if there is legal stability, regulatory stability and reasonable returns, we can raise the money we need,” he said, adding that Iberdrola had raised €11bn in green bonds — including more than €1bn during this year’s crisis — “at very, very cheap rates.”

Iberdrola’s bet on renewable energy has helped it become Spain’s second-largest listed company, with a market capitalisation of about €66bn. It is Europe’s second-biggest energy utility, behind Italy’s Enel.

The group has boosted annual investment by more than 50 per cent over the past two years from €6.2bn in 2018 — in contrast with companies in the oil and gas sector that are cutting capital expenditure under pressure from weak prices.

Iberdrola is also active in the UK, where it owns Scottish Power, now a 100 per cent wind energy company; the US, where its Avangrid unit is the third-biggest wind operator; Brazil; and Mexico. 

Among the big-ticket items on which it is focusing investment this year and next are a joint venture in a $2.8bn US offshore wind farm, a €1.5bn hydro energy storage project in Portugal and a €300m solar energy development — intended to be Europe’s biggest — in Spain.

Mr Galán said the company practised what he called “greenfield M&A” — buying smaller groups and then building up infrastructure around them, as it has done in the US in recent years. 

Iberdrola maintains it can repeat this process with Infigen, an Australian renewables group it is trying to acquire.