Deutsche Bank says only half of business earned cost of capital

Deutsche Bank strategist Henry Allen said that only about half of the bank’s business now generates enough earnings to cover its cost of capital, underscoring a mixed profitability picture as oil prices linger near $110 a barrel and equity markets stay close to record highs【1】.

Profitability pressure amid high oil prices

Allen’s assessment comes as Brent crude hovers around $110 a barrel and U.S. West Texas Intermediate stays above $100 a barrel, levels that mirror the 2022 spike when Brent briefly topped $100 a barrel after Russia’s invasion of Ukraine【1】. Despite these elevated energy prices, the bank’s earnings are not keeping pace, leaving only half of its operations able to meet the cost‑of‑capital threshold. The shortfall reflects broader challenges for banks that rely on fee‑based income and interest margins, which can be squeezed when higher commodity prices feed inflation and pressure central banks to tighten policy.

Market resilience despite the shock

Historically, major energy shocks have triggered sharp sell‑offs in riskier assets, but Allen argues that current conditions lack the three red‑flag ingredients that typically precede a pronounced market correction: a sustained oil shock, clear contractionary data, or aggressive central‑bank tightening【1】. U.S. non‑farm payrolls grew by over 100,000 in both March and April, and the global purchasing managers’ index rose in April, indicating continued economic strength【1】. Meanwhile, the Federal Reserve, European Central Bank, and Bank of Japan have not raised rates since the conflict began, further dampening the likelihood of a rapid policy‑driven sell‑off【1】. As a result, the S&P 500 remains only 1.3 % shy of its peak, and credit spreads in the U.S. and Europe stay tighter than they were at the war’s outset【1】.

Investor sentiment and yield moves

Even though markets are pricing in a continued Middle‑East conflict and a higher chance of stagflation, the recent rise in bond yields is beginning to shift expectations that the Fed may need to address inflation risks stemming from higher oil prices【1】. Prediction‑market betting shows a 31 % chance the Strait of Hormuz will reopen by the end of June and a 46 % chance by the end of July, suggesting lingering geopolitical uncertainty【1】. Nonetheless, the resilience of equities and tighter credit spreads indicate that investors are not yet reacting to a full‑blown energy‑price shock.

What to watch

• Upcoming U.S. non‑farm payroll report (next month) – a key gauge of labor market strength.
• Federal Reserve policy statement – any hint of rate hikes could accelerate yield rises.
• Brent crude price movement – a sustained break above $115 a barrel would meet the “sustained oil shock” criterion.

Deutsche Bank’s cost‑of‑capital coverage figure highlights that profitability pressures are already evident, even as markets remain surprisingly resilient. The next data points on employment and oil prices will be pivotal in determining whether the current stability holds or gives way to a broader correction.