Are the issues of Deutsche Bank insurmountable?

Deutsche Bank is stuck in a vicious circle, and "the bank's problems can prove insurmountable", according to an article on Bloomberg, which quotes the conclusions of a recent analysis by the Berenberg bank.

The biggest German bank needs a significant capital increase, amid an excessive leverage and low chances of obtaining additional funds by selling assets.

James Chappell, an analyst with Berenberg, recommends selling DB stock, as his target is almost 9 Euros/share, down almost 40% below the current price on the Frankfurt stock exchange.

DB shares have fallen 35% since the beginning of the year. In the first quarter of 2016, the profit of DB fell 58% annually, to 236 million Euros, amid a 22% drop in revenues, down to 8.1 billion Euros.

The adequacy rate of Common Equity Tier 1 has fallen 0.4 percentage points over last year's similar period, to 10.7%, while the minimum required level for financial institutions of systemic importance in Europe is 9%.

"The efforts to sell assets are hardened by a credit market lacking liquidity, amid a structural decline in the sector of investment banks", Chappell further writes. In this context, John Cryan, the CEO of DB, will not obtain sufficient funds through the sale of assets.

What will be particularly difficult will also be attracting the additional capital, because "the management ca not offer any return to new capital", according to the Berenberg analyst.

Furthermore, the operational risk of the bank, which is still involved in many lawsuits alleging market manipulation, represent a major obstacle to attracting investors (author's note: see also the article "Is there anything left for Deutsche Bank to violate or manipulate?", BURSA, 04.05.2016).

Furthermore, the issue of the bank's capitalization seems to also be improved by liquidity problems, according to a recent piece of news published by Zerohedge, despite the numerous liquidity injections by the central banks lately.

One of the main objectives of the liquidity programs of the central banks was precisely to reduce competition between financial institutions to attract deposits and eliminate the pressure to raise the interest rate on that segment.

According to Zerohedge, DB has started a campaign in Belgium to attract deposits, with a 3 month maturity, by paying an annual interest rate of 5%. The minimal amount of the deposits is 10,000 Euros, and the maximum amount is 50,000 Euros, and the offer is only valid for new amounts, not on the renewal of existing deposits. The offer is valid until June 24th 2016.

But why doesn't DB use the liquidity facilities of the ECB, where costs are very close to zero? Could it be that it doesn't meet the necessary requirements for the existing programs and it needs funds by June 2016, when, through a lucky coincidence, the EBC is going to launch the new TLTRO II (Targeted longer-term refinancing operations) long-term refinancing program?

Mervyn King, the former governor of the Bank of England warned, in its book "The End of Alchemy", that "liquidity is an illusion; it is here today and gone tomorrow".

Through the four quarterly operations conducted through the TLTRO II program, with a four year maturity, the European Central Bank will try to maintain the illusion of the liquidity in the European banking system.

But will it be enough for Deutsche Bank and other European financial institutions of systemic importance?