Balance Sheet Doubts Widen German Lender’s Credibility Gap

Deutsche Bank has a €37bn credibility gap. That’s the difference between the value of the bank’s tangible assets, and its €16bn market capitalisation. Most analysts and investors blame the bank’s chronically low earnings, and fears that it could face a huge fine from the US Department of Justice over mortgage mis-selling. But there is another big issue that some experts have been highlighting for years: whether its €1.8tn balance sheet is worth what Deutsche says. Concerns about European banks’ balance sheets are usually about whether they have been understating bad loans. Not so at Deutsche, where loans make up less than a quarter of total assets and those loans are mainly to high-quality borrowers in Germany. At Germany’s biggest bank, the assets under the microscope are the €985bn of financial assets largely linked to its markets business — in particular the €28.8bn of those assets valued using models that rely on “unobservable” inputs. These €28.8bn of so-called “level 3 assets” — and another €10.9bn of liabilities — are valued in that way because they are illiquid and their particular characteristics mean there are no “observable prices”. The result? “Valuation of level 3 assets is inherently uncertain,” warns professor Robert Pozen of MIT.