Deutsche Bank Strives to Quell Capital Concern, Sells U.K. Unit

Deutsche Bank AG, eager to turn a tide of pessimism that drove its stock to record lows, dismissed speculation it will have to raise capital and announced the long-awaited sale of a U.K. insurance business for 935 million pounds ($1.2 billion).

The shares rose as much as 4.4 percent after Chief Executive Officer John Cryan, speaking to Bild, Germany’s most-read newspaper, said a capital increase “is currently not an issue.” The lender also agreed to sell Abbey Life Assurance Co. to Phoenix Group Holdings, giving a small boost to its capital.

Deutsche Bank, which runs Europe’s largest investment bank, has long struggled to adapt to an era of tougher capital requirements and diminished trading revenue. But the pressure has intensified since mid-September, when it revealed that the U.S. Justice Department had requested $14 billion to settle a probe tied to residential mortgage-backed securities. While Deutsche Bank said it has no intention of paying such a sum -- almost equivalent to its market value -- the threat of such a large penalty heightened concern Cryan will be forced to tap investors for capital.

Broadest Reach

“Talking to the news outlet with the broadest reach in Germany is some sort of last resort,” said Christoph Kaeserer, a professor and head of the department of financial management and capital markets at Munich’s Technische Universitaet. “Deutsche Bank’s intention is clear -- they want to put an end to recent speculation about their capital strength.”

The shares gained 3.6 percent to 10.93 euros by 3:53 p.m. in Frankfurt, after dropping to a record low Tuesday. On the year, they are still down more than 50 percent, twice the decline in a Bloomberg index of European banks.

Cryan, 55, in charge since last year, is already firing thousands of workers, dumping unprofitable clients and exiting businesses. His reorganization plan, announced last October, has run into hurdles. The lender earlier this year had to put a planned sale of its German consumer-banking unit Postbank on hold, partly because of unfavorable market conditions.

Abbey Sale

The sale of Abbey Life will boost Deutsche Bank’s common equity Tier 1 ratio, a measure of financial strength, by 0.1 percentage point, but will also cause a pretax loss of about 800 million euros ($897 million) as the lender writes down the value of the division. Cryan said earlier this year Deutsche Bank is on track to reach a goal for a CET1 ratio of at least 12.5 percent by the end of 2018.

A Justice Department settlement of more than 5.4 billion euros would imply a capital increase is needed just to pay for the fine, according to Andrew Lim, an analyst at Societe Generale SA. Any additional $1 billion in litigation charges would erode 24 basis points in capital, according to analysts at JPMorgan Chase & Co. A basis point is equivalent to a hundredth of a percentage point.

Deutsche Bank has said it expects to whittle down the settlement amount, as other Wall Street banks did. Cryan told Bild that the Justice Department will treat Deutsche Bank “with the same fairness as American banks that have already agreed on a compromise.”

Contingency Plan

Responding to speculation that the lender asked German Chancellor Angela Merkel for assistance, Cryan said that state aid was “out of the question.”

Muddying the waters further, Die Zeit reported on Wednesday that the German government is working on a contingency plan for Deutsche Bank. Possible scenarios apply in case the lender needs a capital injection to cover litigation costs and include the option of a government stake, the newspaper said, without saying where it obtained the information. The Finance Ministry said in a statement that it’s not preparing a rescue plan for the lender.

“There is a lot of uncertainty surrounding Deutsche Bank currently and they’re doing everything to reassure the public,” said Hans-Peter Burghof, a professor of banking at the University of Hohenheim in Stuttgart, Germany. “They made it clear to the U.S. that there is no blank check from the German government to be expected.”

Cryan has already said that the bank may fail to be profitable in 2016, calling it a “peak restructuring year” for the company.

‘Comfortably Equipped’

“We are restructuring the bank, we have fewer risks in the books than before and we are comfortably equipped with free liquidity, that is, financial means,” Cryan told Bild. “I always said that this transformation will require time. Everything is going according to plan in this respect.”

China’s efforts to limit capital outflows that could weaken its currency are also creating a potential headache for Deutsche Bank, which is selling a $3.9 billion stake in a Chinese lender and seeking permission to move proceeds offshore. The State Administration of Foreign Exchange is reviewing applications to move large amounts of money on a case-by-case basis and its focus is on preserving currency stability, people with knowledge of the matter said. One option the regulator has proposed is for Deutsche Bank to remit the proceeds from selling its Huaxia Bank Co. holding in batches rather than in one go, the people said, asking not to be named as the informal discussions are private.

‘Incredibly Dilutive’

Europe’s largest banks have been forced to shrink their securities units to help shore up earnings. Credit Suisse Group AG CEO Tidjane Thiam said on Tuesday that the Swiss lender is mulling ways to cut costs further at its global markets unit, which houses securities trading. At Barclays Plc, CEO Jes Staley has pledged to focus on more profitable parts of the business such as consumer banking.

Deutsche Bank could raise as much as 2.8 billion euros by taking a tougher stance on employee compensation and not giving bonuses to thousands of staff, according to a note this week by Autonomous Research CEO Stuart Graham that was seen by Bloomberg News. It would also “provide a strong signal” to shareholders, he wrote.

Asked whether Deutsche Bank will scrap bonuses for the executive board for a second year, Cryan said that “nobody has unrealistic expectations” as the bank restructures its businesses. The board of directors will decide at the end of the year, he said.

“Any equity issuance would be incredibly dilutive right now with the overhang of fines facing Deutsche Bank, so they don’t want to be doing that,” said Patrick Armstrong, managing partner at Plurimi Wealth, in an interview with Bloomberg Television.

— With assistance by Ambereen Choudhury, David Scheer, and Guy Johnson