Deutsche Bank has denied seeking assistance from Berlin and said it had no plans for a capital increase after investors attacked the embattled bank, sending its share price to its lowest levels in more than three decades.
Germany’s biggest bank closed down more than 7 per cent on Monday, pushing its shares to their lowest level since 1983 despite the bank’s denial of German media reports that it had sought support from Berlin in its regulatory fight with Washington — and been turned down.
Deutsche has seen its shares fall 55 per cent in the last year amid persistent questions about its financial health, concerns that have been compounded by the US Department of Justice’s recent demand for $14bn to settle allegations of mis-selling mortgage securities.
The bank has said it will not pay anywhere near that figure, which is close to its total market capitalisation of $18bn, and on Monday insisted that its chief executive, John Cryan, had “at no point” asked Angela Merkel, the German chancellor, to intervene in the stand-off with the DoJ.
The report by the German magazine Focus also said Ms Merkel had ruled out a Deutsche rescue ahead of 2017’s German elections.
“This question [of a government rescue] is not on our agenda: Deutsche Bank is determined to meet the challenges on its own,” said Jörg Eigendorf, Deutsche’s chief spokesman. “The question of a capital increase is currently not on the agenda, we comply with all regulatory requirements.”
Investors were not swayed by the denial, and the Deutsche concerns helped drag down the rest of the European banking sector, with Commerzbank closing down 3.7 per cent, UniCredit down 3.5 per cent and BNP Paribas down 3.1 per cent.
Investors remain nervy about Deutsche’s capital position, particularly as reports emerged of delays to the sale of the bank’s stake in Huaxia in China. The Chinese sale would lift Deutsche’s 10.8 per cent common equity tier one ratio by 40 basis points, bringing it closer to the 12.59 per cent average ratio across Europe’s top 10 banks by market value.
“Everyone’s pretty much convinced now that they have to raise equity. They don’t have any margin of error. I don’t see how they can avoid it,” said Jerôme Legras, an investor at Axiom Alternative Investments, which has been short the bank’s stock for more than a year.
The DoJ demand has put Mr Cryan in a difficult position. With the share price so low, analysts say he is reluctant to go to market to raise cash in order to cover the penalty. But until the DoJ case is settled, its share price is unlikely to rise.
“Even if the DoJ settlement ends at the low end of expectations — regardless of that, they need to boost capital, and they can’t do that organically,” said Philippe Bodereau, an investor at Pimco. “They either need to raise equity or divest one of their better assets.”
Deutsche’s woes illustrate how difficult it is for European banks to overcome the challenges of post-financial crisis banking. Mr Cryan has previously said that bank mergers are one solution, and Deutsche has had talks with Commerzbank about a combination. Mr Cryan found an ally for consolidation in European Central Bank president Mario Draghi on Monday.
Mr Draghi said there was an “overcapacity of banks in Europe”, adding that “governments should have an eye on and create legislative conditions for consolidation to happen”.
“Do you really want to have a system that only reaches its right dimension after protracted failures?” Mr Draghi said. “Banks in Europe should be strong and profitable. One of the reasons for low profitability is exactly [the banking sector’s] overcapacity.”
As Deutsche’s woes have mounted, a number of hedge funds have built up bets that the lender’s shares will fall, including the London-based fund Marshall Wace, as well as the US-based Highfields Capital Management and Discovery.
According to regulatory filings, Marshall Wace has established the largest single short position against Deutsche equivalent to 0.93 per cent of its issued shares, worth about €135m at current prices. Highfields has sold short 0.74 per cent, while Discovery — known for its bearish views on the wider market — has bet against 0.61 per cent of Deutsche stock.
Soros Fund Management, the family office run by George Soros, had built up a short position worth more than €100m against the German bank around the time of Britain’s vote to leave the EU, but has since scaled this back to below the level where it must be publicly disclosed.
Some investors called for radical action. “The DoJ is asking for 10-times more from Deutsche than they asked for from any of its US peers, with no disclosure — it is extortion,” said Davide Serra, founder of Algebris, which invests in the junior debt of European banks. “Ultimately I wouldn’t pay it — and I would consider exiting US.”
In a rare public intervention, Andreas Utermann, chief investment officer of Allianz Global Investors, said that if push came to shove, the German government would stand behind Deutsche.
“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,” he said in a Bloomberg Television interview. “It’s too important for the German economy.”
Chris Wheeler, a London-based analyst at Atlantic Equities, took a similar line but warned that the bigger worry about “days like today” is that Deutsche starts losing revenue because of the negative news around the bank itself.
“John [Cryan] always needed robust revenue growth to get him through this period [of restructuring],” Mr Wheeler said. He added that the businesses that were “supposed to thrive” under Deutsche’s new structure, such as its investment bank, were those most at risk from losing revenue if counterparties became uncomfortable dealing with the German bank.
The total number of Deutsche shares out on loan, a proxy for the amount that have been sold short, rose from 1.72 per cent of its issued shares to 3.07 per cent over the past week, according to data from Markit.
However, the amount on loan remains lower than the 4.3 per cent level reached in July after the UK’s EU referendum.
On a market cap basis, Deutsche now ranks 78th among global banks, just below the likes of Malaysia’s Public Bank and Brazil’s Itausa Investimentos Itau.
Many investors do not believe that the restructuring plan unveiled a year ago by Mr Cryan will be enough to alter the bank’s fortunes. Some have been pushing for a sale of the asset management division, while others want to see deeper cost-cutting.
Additional reporting by Mehreen Khan, Miles Johnson and Martin Arnold in London
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