Following a media report that said that the German government wouldn’t step in to back the lender, fueling investor concerns about its weakened finances, Deutsche Bank AG shares dropped to a record low and its riskiest bonds declined.
Bringing losses to about 52 percent this year, the shares slumped 6 percent to 10.73 euros at 1:55 p.m. in Frankfurt.
The U.S. Justice Department requesting $14 billion to settle a probe tied to residential mortgage-backed securities have put at risk Chief Executive Officer John Cryan’s efforts to shore up profitability and capital, by cutting thousands of jobs and shrinking. With Germany’s Focus magazine reporting that the government had ruled out any backing for the company, concerns that the lender will be forced to tap investors were raised by the amount that Deutsche Bank has said it has no intention to pay.
“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. Clearly headlines around the DOJ settlement and the $14 billion continue to weigh on the stock,” Daniel Regli, an analyst at MainFirst.
Focus magazine reported, citing unidentified government officials that ahead of national elections in September 2017 chancellor Angela Merkel has ruled out state aid for Deutsche Bank. The magazine reported that there was also no intention for the government to step into the bank’s legal imbroglio with the US Justice Department.
There are “no grounds” for speculation over state funding for Deutsche Bank, Steffen Seibert, a spokesman for Merkel, told reporters in Berlin on Monday. The government expects “fair result” in the lender’s talks with the DOJ, the spokesperson added.
The Bank has already said that it has no plans to settle “anywhere near the number cited,” with negotiations at an early stage with reference to the DOJ claims. Cryan had “at no point” asked Merkel for assistance, spokesman Jörg Eigendorf said in an e-mailed statement in response to the Focus report. He said: “the bank is determined to meet challenges on its own” and the “question for a capital increase is currently not on the agenda.”
“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. It’s basically a waiting game,” said Otto Dichtl, a fixed-income analyst at brokerage Stifel Nicolaus Europe Ltd. in an interview.
JPMorgan Chase & Co. analysts wrote that while any additional $1 billion in litigation charges would erode 24 basis points in capital of the bank, 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. According to Andrew Lim, an analyst at Societe Generale SA, a capital increase is needed just to pay the fine would be implied for any settlement above 5.4 billion euros.
At the end of the first half that’s roughly the amount the bank had set aside for all legal disputes. The quality of subprime mortgage bonds the bank created and sold during the U.S. housing boom that led to the 2008 crisis is under scrutiny with allegations in the case that the bank misled investors about the quality. The legal issues including precious metals trading and billions of dollars in transfers out of Russia of the bank are also being inquired.
(Adapted from Bloomberg)
Categories: Economy & Finance