Deutsche Bank May Have $18 Billion Italy, Spain Gap

Deutsche Bank AG (DBK) has a funding gap of as much as 14 billion euros ($17.5 billion) at its Italian and Spanish units which could reduce capital levels at the firm if those countries leave the euro, according to analysts at Espirito Santo Investment Bank.

Deutsche Bank’s loans amount to 205 percent of deposits at the Italian unit and 314 percent in Spain, according to London- based analyst Andrew Lim, who cited company filings. If those countries exit the euro and the new currencies fall 30 percent, the Frankfurt-based lender could lose as much as 4.2 billion euros of equity as the value of assets at those divisions declines while some funding remains in euros, he said.

The impact would be “quite significant for a bank which is already very weakly capitalized,” Lim wrote in a note today, reiterating his “sell” recommendation on shares in Germany’s biggest bank. The effect of those two states leaving the euro could be mitigated by the wholesale funding of the units, which would also be devalued in the case of a breakup of the common currency, the analyst said.

The prospect of a Greek exit from the single currency has cast doubt on the euro’s survival and prompted concern about banks’ cross-border assets and liabilities, which might be re- denominated into legacy currencies in the event of a break-up. If a bank’s loans and securities transformed into a depreciating lira or peseta, while its borrowings remained in euros, the lender would have to absorb losses.

Local Funding

Armin Niedermeier, a Frankfurt-based Deutsche Bank spokesman, said the lender doesn’t generally comment on analyst reports.

Credit Agricole SA, France’s third-largest bank by market value, reduced funding, including capital, to its Emporiki Bank unit in Greece to 5.2 billion euros at the end of March from 11.4 billion euros a year earlier, company reports show.

Banks have responded to the possibility of a euro break-up by seeking to fund foreign assets with borrowings in the same jurisdiction. Deutsche Bank SpA, the Italian unit, has about 6.5 billion euros of borrowings, including 3.5 billion euros from the European Central Bank in its longer-term refinancing operation in February, data compiled by Bloomberg show.

Separately, the lender’s Milan branch has borrowed about 1.13 billion euros, the data show. The Spanish unit has borrowed 5.58 billion euros, including 5.5 billion under the ECB’s three- year loan facility.

Leaving out the LTRO borrowings, the funding gap in Italy and Spain would have been as much as 23 billion euros at the end of 2011, according to Lim.

To contact the reporter on this story: John Glover in London at

To contact the editor responsible for this story: Paul Armstrong at

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