Do you know that one of the strongest and largest banks in Europe is in big trouble?
Yes, Deutsche Bank struggles go way back to last year, when the company reported a loss of €6.8 billion.
And just recently, news came out that the bank faces a $14bn charge over mis-selling mortgage securities in the US.
But if you don't own Deutsche Bank's shares, why should you care?
Well, South African investors have entrusted more than R16 billion in Deutsche Bank's exchange-traded funds and notes (ETFs and ETNs)?
With the bank on the brink of financial disaster, an even bigger problem is starting to loom - You could lose all your money if you're invested in Deutsche Banks' ETNs.
Let me explain…
“A failure of Deutsche Bank would trigger a systemic banking
contagion the likes of which the Western world has never seen…”
This is what financial gurus and investors are saying about Deutsche Bank. But is this warranted?
So far this year, the group’s shares have dropped nearly 50%. One of the reasons is its struggling to raise cash. The company even admitted it might borrow cash from its investors. And obviously investors don’t want to invest more cash in a struggling company.
What’s more, Deutsche Bank profits are in decline. In 2015, it reported a loss of €6.8 billion. In 2016, revenue slumped 20%, while income was down 98% from the previous year.
Thirdly, the company has just been slapped with a $14 billion fine by the US Department of Justice for mis-selling residential mortgage-backed securities before the 2008 financial crisis.
But also, a combination of other factors continues to hurt Deutsche Bank. For example: Negative interest rates across European countries has hampered its ability to make money, by eroding profits between their short-term borrowing costs and what they can charge for long-term loans.
And the company is in a radical restructuring process that includes shedding 15,000 jobs.
Why SA investors could lose their money in Deutsche Bank’s ETNs
Firstly, exchange-traded funds (ETFs) are regulated under the Collective Investment Schemes Control Act, which requires all assets to be entrusted to an independent trustee for safekeeping.
So the good news for investors in Deutsche Bank’s five JSE-listed ETFs is their money is as secure as the gold in Fort Knox. Deutsche Bank can’t access it to get the funds they desperately need.
But the problem lies with Deutsche Bank’s exchange-traded notes (ETNs)…
You see, ETNs are listed notes backed by the credit risk of the issuer.
In other words, ETNs are solely backed by the issuer’s promise to deliver investors the value of the index. So South African investors with R4.2 billion tied up in ETNs, have only this to rely on.
So if the company fails, how could it pay investors? It can’t.
And that’s why you need to be careful if you’re invested in any Deutsche Bank’s ETNs.
If you’re invested in these three Deutsche Bank ETNs, you could lose all your money
1. DB MSCI China ETN
This ETN tracks the MSCI China TRN Index. The Index is calculated in US dollars and includes companies in China and listed in USD in the form of B shares either on the Shanghai Stock Exchange or the Shenzhen Stock Exchange.
2. DB MSCI Emerging Market ETN
This ETN tracks the MSCI Emerging Market Index which is designed to measure equity market performance of emerging markets. It consists of 23 emerging market country indices like Brazil, South Africa, Turkey and China.
3. DB Africa Top 50 Capped ETN
This ETN tracks the MSCI EFM Africa Top 50 Capped Index, which reflects the performance of large and mid-cap companies in Africa. It invests only in South Africa, Egypt, Nigeria and Kenya.
If you haven’t invested in these ETNs, I recommend you stay away.
Until next time,
Joshua Benton, Real Wealth