Early today, Deutsche Bank disappointed markets when it reported a second quarter Net Income number of €335 million, or half of what the company made in the previous quarter, and less than half of what consensus expected. However, just like in the US, where as we showed previously it was FASB accounting gimmicks that “allowed” Bank of America to convert a loss into a $4 billion profit, so Deutsche Bank’s real Net Income, aka its Total Comprehensive Loss, number when factoring all the other MTM Income Statement components such as AFS, FX translation and pension adjustments, was lower by €1.1 billion.
But not even that was the real story in DB’s numbers. Recall that it was Zero Hedge who in April first brought attention to Deutsche Bank’s epic, single biggest on earth, total gross derivative exposure of €55.6 trillion, bigger than that of JP Morgan: disclosure which as we understand caused some consternation among German political circles. This followed our previous disclosure from May 2012 when we first reported that the bank’s Core Tier 1 ratio as the worst of any bank in Europe, and thus the world. This was subsequently reinforced by none other than former Kansas Fed president and current FDIC Vice Chairmam, Tom Hoenig, who said that Deutsche Bank is “is horribly undercapitalized… it’s ridiculous.” Naturally this means that just like every US bank, the real story is not in the income statement but in the balance sheet.
It is here that we find something disturbing, but maybe also positive.
Recall also that when we reported that Deutsche Bank’s total notional gross derivative exposure as of December 31, 2012 (alas only updated once per year) was €55.6 trillion, we observed that this number has an accounting net equivalent on the bank’s books of two components: a positive market value of €777 billion and a negative market value of €756 billion.
It is when one observes the decline in Deutsche Bank’s two net derivative exposures since 2011, one notices something curious: over the past year, the nominal net exposure of the bank’s positive and negative derivative market values has collapsed from a combined total of €1.678 trillion to just €1.253 trillion, with consecutive declines over each of the past 4 quarters for a cumulative net deleveraging of €425 billion.
Furthermore, as the chart shows, over the same time period the bank’s excess deposits over loans initially rose to a two year high of €204 billion and has since declined to just €166 billion: the lowest in two years. Finally, looking merely at DB’s total assets, these too peaked in June of 2013 at €2.24 trillion and have since declined by €1.91 trillion.
Which begs the question: if Europe is so “fine” and on the verge of a “recovery” as its politicians repeat day after day, why is the biggest bank in Europe, and also the biggest bank in the entire world in terms of gross derivative exposure, deleveraging at the fastest pace since Europe’s near-death experience in the summer of 2011?
Finally, and back by popular request, here once again is Deutsche’s total derivative nominal gross exposure compared to Germany’s GDP.