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Deutsche Bank’s ‘annus horribilis’ reveals the true cost of negative interest rates

January 30, 2020, 10:38 AM UTC

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Guten morgen, Bull Sheeters. Yes, there’s going to be a bit of German in today’s newsletter.

But first….the Asian and European markets are in the red, as are the U.S. futures as I write. The Wuhan coronavirus (death toll at 170 and cases above 7,700) is dragging the markets lower. But there’s also the mixed earnings picture (Tesla good, Facebook bad) and diverging central bank maneuvers (will the BOE cut?… what’s the Fed thinking in holding pat?) that have given investors reason to hit the “pause” button.

Let’s go back to earnings. This morning, early out of the gates, we had Deutsche Bank reporting its Q4 results. And they were bad. Deutsche Bank is a stock to watch. It has a host of problems, many self-inflicted. But it’s also been hammered by negative interest rates—or negativzinsen in German. Since the European Central Bank dropped the nominal deposits rate below zero in June 2014, DB shares have sunk more than 70%. CEO Christian Sewing last year said negative rates “ruin the financial system.”

And here’s why. Negative rates obliterate banks’ loans business. This is true everywhere. If you comb through a bank’s quarterly results you’ll see a line item called “net interest income.” It’s a good indicator for how the banks’ loans and accounts business, a traditional profit-driver, is doing.

Banks’ net interest income has been falling for several quarters in Europe, and negative rates is the primary reason. But this phenomenon is also spreading across the Atlantic, as today’s chart shows, with the decline in nominal interest rates taking hold more broadly across the retail banking sector.

The cost of low and negative rates


I looked at the last four quarters for DB and its American peers. The trend—showing quarter-on-quarter declines (by percentage)—looks worryingly similar for all four. Net interest income—the fees collected for things like issuing loans and opening new accounts—is going down, down, down. At Wells Fargo, the trend is particularly acute with net interest income declining 11% last quarter relative to Q4 2018. JP Morgan Chase, the powerhouse of the sector, is the least exposed, but it’s not entirely immune from this phenomenon either. Its Q4 2019 net negative income came in 2% lower than the year-ago period. Deutsche Bank’s fell 5.5% last quarter.

In this low and negative rates environment, the banks have had to reinvent their core business by, for example, moving into trading and wealth management, two sectors that are less exposed to central banks’ rates policy.

At the start of today’s session, Deutsche Bank shares were trading lower this morning on the poor results. Meanwhile, JP Morgan Chase, BofA and Wells Fargo are all down year-to-date.

The Germans have a word for what some American investors are feeling about now: fremdshaeman. They feel your pain.

Bernhard Warner

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