March 27 (Bloomberg) -- Deutsche Bank AG, continental Europe’s biggest bank, slid in Frankfurt trading after Standard & Poor’s said it may cut the lender’s credit rating due to concern about capital levels.
The company dropped 4 percent to 30.05 euros at 12:40 p.m., falling to the lowest level since September and almost doubling losses this year to 8.9 percent. That compares with today’s 2.6 percent drop for the main Euro Stoxx Banks Index.
Deutsche Bank, the least capitalized of Europe’s biggest investment banks, faces “substantial risks” to its capital due to the debt crisis, litigation and stricter regulation, S&P said. That has stoked concern among some investors that the firm will have to sell shares to boost its reserves, said Ingo Frommen, an analyst with Landesbank Baden-Wuerttemberg in Stuttgart, Germany.
“There’s continued worry about the state of the finance industry and the European debt crisis,” Frommen, who recommends investors buy Deutsche Bank’s stock, said by telephone. “Deutsche Bank may see its rating cut if the environment worsens. With its lower capitalization, that has people concerned about a share sale.”
S&P placed the bank’s A+ long-term rating on CreditWatch negative, it said in a statement late yesterday.
“We still see substantial risks to Deutsche Bank’s internal capital generation from unresolved economic and financial problems in the euro zone,” S&P said. It cited “tensions” regarding the rescue of Cyprus this month.
Christian Streckert, a Frankfurt-based spokesman for Deutsche Bank, declined to comment on the S&P report.
The Federal Reserve’s plan to order non-U.S. banks to supply capital for their U.S. units may also “significantly increase” the cost of doing business in that country for Deutsche Bank and other foreign lenders, S&P said.
Deutsche Bank co-Chief Executive Officers Anshu Jain and Juergen Fitschen have sought to boost capital ratios by reducing risk, selling assets and re-calculating the value of assets since taking over in June last year.
The lender’s core Tier 1 capital ratio rose to 7.8 percent at the end of 2012 from less than 6 percent a year earlier, company filings show. That’s still lower than the measure of financial strength at Barclays Plc, Credit Suisse Group AG and UBS AG, data compiled by Bloomberg Industries show.
Jain told reporters in January that while he’ll “take pain” to raise capital without diluting investors in a share sale, he can’t rule out asking shareholders for cash should regulation tighten.
Deutsche Bank probably won’t have to sell shares and the stock may gain after the company reports first-quarter earnings next month, said Frommen.
S&P said it will probably resolve the CreditWatch status in the “coming weeks” either by affirming the ratings or lowering them by one notch.
Deutsche Bank said last week that costs linked to U.S. mortgage lawsuits and other regulatory probes meant it had revised down 2012 profit by about 400 million euros ($514 million) to 291 million euros.
The lender has set aside 500 million euros for possible fines related to alleged rate-rigging and 300 million euros related to U.S. sanctions on Iran, Der Spiegel newspaper reported March 24 without citing anyone.
The world’s biggest banks are facing investigation and lawsuits linked to the manipulation of benchmark interest rates as well as the improper sale of products such as interest-rate derivatives. Deutsche Bank is also a defendant in “numerous” civil suits as an issuer or underwriter in residential mortgage-backed securities, it said in October.
“The wave of litigation has to end at some point, this year and next will probably be the high point for Deutsche Bank,” Michael Seufert, an analyst with Norddeutsche Landesbank in Hanover who recommends investors buy the stock, said by telephone. “The issue is prescient for investors right now because it is having an effect on profit.”