Deutsche Bank is given the cold shoulder
DEUTSCHE Bank shares fell to a record low and its riskiest bonds declined after a media report said the German government would not back the lender, fuelling investor concerns about its weakened finances.
The shares slumped 6% to €10.73 at 1.55pm in Frankfurt, bringing losses to about 52% in 2016. The lender’s €1.75bn of 6% additional tier 1 bonds, the first notes to take losses in a crisis, fell about 2c on the euro to 73c, near a seven-month low, according to data compiled by Bloomberg.
CEO John Cryan’s efforts to shore up profitability and capital, by cutting thousands of jobs and shrinking, have been put at risk by the US justice department requesting $14bn to settle a probe tied to residential mortgage-backed securities. The amount, which Deutsche Bank has said it has no intention to pay, sparked concerns that the lender would be forced to tap investors, with Germany’s Focus magazine reporting that the government had ruled out any backing for the company.
“Nobody believes that they will end up paying that amount, but for some investors, it might be a concern that even the German government is discussing Deutsche Bank’s situation,” Daniel Regli, an analyst at MainFirst said. “Clearly headlines around the justice department settlement and the $14bn continue to weigh on the stock.”
Chancellor Angela Merkel has ruled out state aid for Deutsche Bank ahead of national elections in September 2017, Focus magazine reported, citing unidentified government officials. Merkel also declined to step into the bank’s imbroglio with the justice department, the magazine reported.
Steffen Seibert, a spokesman for Merkel, said on Monday there were “no grounds” for speculation over state funding for Deutsche Bank, adding that the government expected a “fair result” in the lender’s talks with the justice department.
The lender has already pushed back against the justice department claims, saying that it has no plans to settle “anywhere near the number cited”, with negotiations at an early stage.
Responding to the Focus report, spokesman Jörg Eigendorf said that Cryan had “at no point” asked Merkel for assistance. The bank is “determined to meet challenges on its own” and the “question for a capital increase is currently not on the agenda”, he said.
“Of course, they can’t easily raise capital ahead of a settlement and ahead of being able to tell investors a number that the settlement might cost them,” said Otto Dichtl, a fixed-income analyst at brokerage Stifel Nicolaus Europe, on Bloomberg Television. “It’s basically a waiting game.”
A settlement range of $3bn to $3.5bn for residential mortgagebacked securities would leave the bank room to settle other legal issues, while any additional $1bn in litigation charges would erode 24 basis points in capital, JPMorgan Chase & Co analysts wrote. Any settlement above €5.4bn would imply a capital increase is needed just to pay the fine, according to Andrew Lim, an analyst at Societe Generale.
That is roughly the amount the bank had set aside for all legal disputes at the end of the first half.
The case concerns allegations that the bank misled investors about the quality of subprime mortgage bonds it created and sold during the US housing boom that led to the 2008 crisis. Deutsche Bank also faces inquiries into legal issues including precious metals trading and billions of dollars in transfers out of Russia.
In a memo to staff released earlier in September, Cryan reiterated a pledge to resolve what he called “important litigation cases” as he restructures the German bank.
At the time, he ruled out plans to sell the asset-management business to shore up capital ratios after previously shooting down media reports that the lender is looking to merge with rival Commerzbank.
Deutsche Bank may be the biggest contributor to systemic risk among lenders, the IMF said in June.
The bank has a “very comfortable” liquidity position, with the third quarter drawing to a close “and I can tell you that we are fine and very comfortable here”, Eigendorf told CNBC in an interview on Monday.
Short sellers, who profit by selling borrowed shares and buying them back at lower prices, renewed their wagers against the Frankfurt-based bank, with bearish bets rising to 3% of shares outstanding on September 22 from almost a threemonth low of 1.7% on September 16, according to data compiled by Markit.
“I don’t buy at all what’s coming out of Germany in terms of Germany not wanting to step in ultimately if Deutsche Bank was really in trouble — it’s too important for the German economy,” Andreas Utermann, global chief investment officer at Allianz Global Investors, said.
“Ultimately, it’s a political issue which will get resolved at a lower price.”