Why Deutsche Bank’s Massive Charges Could Crush Its Dividend

While the losses and charges involve litigation expenses, it turns out that things may be so bad that Deutsche Bank’s dividend may be reduced or eliminated for the rest of this year.

At issue is €5.8 billion (or about $6.5 billion) in impairment charges. These are tied to higher regulatory capital requirements for the securities and corporate business and also tied to the private client operations.

Included among the charges, this one less than $1 billion, is a nearly 20% stake in Hua Xia Bank in Shanghai, China. Deutsche Bank no longer considers this stake to be strategic.

Also included are a set of charges worth over $1 billion tied to litigation expenses.

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It turns out that 2015 has not been that great for Deutsche Bank. It was earlier this summer when the banking giant’s co-CEOs resigned. Then, shortly after that, Deutsche Bank’s offices were raided by law enforcement officers in Germany over potential tax fraud that was tied to securities transactions by customers.

What is worse is that this may not be the end of the charges. Deutsche Bank said that the majority of its litigation provisions of approximately €1.2 billion are not expected to be tax deductible. The bank also warned that the final litigation provisions in the quarter may be affected by further events before it finalizes and reports third-quarter results. By our view, that is code for “there could be more before this is all said and done.”

Where things get tricky regarding Deutsche Bank’s dividend is that the bank’s year-to-date results through the third quarter are expected to be a loss of approximately €3.3 billion on an income before income taxes basis and a net loss of €4.8 billion. It means the huge charges have ruined the whole year’s worth of income. On the dividend front, with roughly a 3% yield in American depositary shares (ADSs), Deutsche Bank’s press release said:

As part of the planning for the implementation of Strategy 2020, the Management Board will recommend a reduction or possible elimination of the Deutsche Bank common share dividend for the fiscal year of 2015.

It is not unusual for new management to throw out everything but the kitchen sink when they clean house. After all, what happened earlier is generally not tied to being under their watch. That being said, this kitchen sink quarter seems miserable for Deutsche Bank.

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Deutsche Bank’s ADSs trade on the New York Stock Exchange and closed up 1.4% at $28.79, against a 52-week range of $26.04 to $36.21. Those ADSs were last seen down by over 6% at $26.99 in an active after-hours trading session, with more than 400,000 shares traded since the closing bell.

Now for the final warning: this is bad enough that it may hurt other banking giants in Germany and Europe as well in their share trading. Let’s just hope that the fallout stays localized in the European banks rather than in the Asian and American banks too.