Deutsche Bank Slumps as Investors Question Lender’s Health

  • Bank says it’s “determined to meet challenges on its own”
  • Focus reports that German government has ruled out state aid

Making the Case for a German Bailout of Deutsche Bank

Deutsche Bank AG shares dropped to a record low and its riskiest bonds declined after a media report said the German government wouldn’t step in to back the lender, fueling investor concerns about its weakened finances.

The shares slumped 6 percent to 10.73 euros at 1:55 p.m. in Frankfurt, bringing losses to about 52 percent this year. The lender’s 1.75 billion euros ($2 billion) of 6 percent additional Tier 1 bonds, the first notes to take losses in a crisis, fell about 2 cents on the euro to 73 cents, near a seven-month low, according to data compiled by Bloomberg.

Chief Executive Officer John Cryan’s efforts to shore up profitability and capital, by cutting thousands of jobs and shrinking, have been put at risk by the U.S. Justice Department requesting $14 billion 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 will 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. “Clearly headlines around the DOJ settlement and the $14 billion 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. The German leader also declined to step into the bank’s legal imbroglio with the Justice Department, the magazine reported.

Steffen Seibert, a spokesman for Merkel, told reporters in Berlin on Monday that there are “no grounds” for speculation over state funding for Deutsche Bank, adding that the government expects a “fair result” in the lender’s talks with the DOJ.

The lender has already pushed back against the DOJ 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 in an e-mailed statement 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.

‘Waiting Game’

“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 Ltd. in an interview with Francine Lacqua and Tom Keene on Bloomberg Television. “It’s basically a waiting game.”

A settlement range of $3 billion to $3.5 billion for residential mortgage-backed securities would leave the bank room to settle other legal issues, while any additional $1 billion in litigation charges would erode 24 basis points in capital, JPMorgan Chase & Co. analysts wrote. Any settlement above 5.4 billion euros would imply a capital increase is needed just to pay the fine, according to Andrew Lim, an analyst at Societe Generale SA.

That’s 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 U.S. 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.

‘Political Issue’

In a memo to staff released earlier this month, Cryan reiterated a pledge to resolve what he called “important litigation cases” as he restructures the bank. At the time, he ruled out plans to sell the asset-management business to shore up capital ratios after previously shooting down press reports that the lender is looking to merge with rival Commerzbank AG.

Deutsche Bank may be the biggest contributor to systemic risk among lenders, the International Monetary Fund 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 percent of shares outstanding on Sept. 22 from almost a three-month low of 1.7 percent on Sept. 16, according to data compiled by Markit Ltd.

“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 on Bloomberg Television. “Ultimately, it’s a political issue which will get resolved at a lower price.”

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