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Market fears force Deutsche Bank to give assurances over financial health Shares in Deutsche Bank sharply up amid speculation of DoJ deal
(about 9 hours later)
Deutsche Bank is attempting to quash fears about its financial health as its shares crumbled to new lows on Friday, driving stock markets in Asia and Europe sharply lower. Shares in Deutsche Bank have gyrated wildly before closing sharply higher amid speculation the embattled German lender was on the brink of a deal with the US authorities over a decade-old mis-selling scandal that would be less damaging to its finances.
Shares in Germany’s biggest bank fell below €10 in early trading, a slide of 10% that had been foreshadowed overnight when they slumped in the US following a report by Bloomberg that 10 hedge funds had reduced their financial exposure to Deutsche Bank. On a day of big swings on the market, shares in Germany’s biggest bank initially slumped as much as 9% on Friday to leave the stock below the key €10 (£8.65) level. But by the end of day on the Frankfurt exchange, they were 6% higher at €11.57. They have lost 50% of their value this year.
John Cryan, the Briton who has been running the bank for 15 months, attempted to calm nerves on Friday morning with a message to Deutsche Bank staff. The rally continued in the US after Europe closed, buoyed by an attempt by chief executive John Cryan to calm nerves with a memo sent to the bank’s 100,000 staff and hopes of a deal with the US Department of Justice over the mis-selling of mortgage bonds between 2005 and 2007. An Agence France-Presse report suggested the bank might be doing a deal with the DoJ to pay just over a third of the $14bn (£10.8bn) penalty that was originally suggested by the DoJ.
“Our bank has become subject to speculation. Ongoing rumours are causing significant swings in our stock price. It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust,” Cryan said in a memo. Cryan said there were “forces in the market” trying to destabilise the bank after its shares plunged to 30-year lows amid fears it would not be able to afford to pay $14bn.
The bank’s share price recovered slightly after Cryan’s memo, climbing back above €10 but still down 4% on its opening level at €10.44. The AFP report said that Cryan was on the brink of agreeing a penalty of $5.4bn with the DoJ.
Deutsche’s plight had a knock-on effect in the UK, with shares in Barclays and Royal Bank of Scotland both falling 3% on Friday morning and the FTSE 100 falling 1.5% – 100 points – while stock markets in Germany and France were also 1.5% lower. Cryan – a Briton who has been at the helm of Deutsche for 15 months – fired off his memo to staff after a Bloomberg report rattled nerves by revealing 10 hedge funds had taken some business away from the bank. “Our bank has become subject to speculation. Ongoing rumours are causing significant swings in our stock price. It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust,” said Cryan.
While Deutsche has been the focus of sector-wide concerns about banks’ ability to cope with low interests since the start of the year, anxiety about its ability to pay a $14bn (£10.5bn) penalty from the US Department of Justice for the sale of mortgage bonds a decade ago has driven its shares to near-30-year lows this week. The shares are now taking a fresh hit on concerns that billions of euros are being withdrawn by hedge funds. Deutsche’s plight has prompted fears that global markets are facing turmoil of the kind triggered by the collapse of Lehman Brothers eight years ago this month. While Lehman’s boss also blamed speculators, Cryan argued Deutsche was strong while policymakers also insisted any comparison is unfair.
Cryan has insisted the bank will not pay the $14bn the justice department has demanded. Under pressure from some analysts to accelerate his restructuring programme, Cryan is understood to be in the US, which might indicate that the bank is trying to further engage with the authorities. Deutsche’s gyrations initially prompted a knock-on effect in the UK, with shares in Barclays and Royal Bank of Scotland – both of which face a similar investigation by the DoJ – falling sharply before regaining their losses.
He told staff: “There is therefore no basis for this speculation. Nor can uncertainty about the outcome of our litigation cases in the US explain this pressure on our stock price, if we take the settlements of our peers as a benchmark.” The FTSE 100 also clawed back lost ground. After slumping100 points it ended 20 points lower. Germany’s Dax index ended 1% higher.
Cryan pointed to four factors to support Deutsche’s “strong fundamentals”: restructuring on track – including the sale of UK business Abbey Life this week; reduction in exposure to risky clients; €1bn of first-half profits; €215bn of easy-to-sell assets in times of crisis. But in an indication of the anxiety in the market the price of bonds which Deutsche can use to bolster its financial strength in times of crisis – known as CoCos – plunged to new lows.
“You will hear back from me soon. Please keep working as you have been doing so far. We are and we remain a strong Deutsche Bank,” he told staff,7,000 of whom work in London. From the moment the $14bn penalty was demanded Cryan has insisted the bank would not pay that amount. Reports this week – strenuously denied – suggested the bank had approached the German chancellor, Angela Merkel, for help and sparked a fresh round of concern about its financial strength.
Analysts at Credit Suisse said the share price reaction was overdone as the penalty would not be as the reported $14bn. “We have modelled €4bn for this issue,” they said, and calculated Deutsche could pay €9bn “before breaching minimum capital requirements, a comfortable cushion in our view”. Cryan insisted there was “no basis for this speculation” as he set out four factors to support Deutsche’s “strong fundamentals”. He said its restructuring was on track – including the sale of UK business Abbey Life this week; that the bank had reduced its exposure to risky clients; that it had made €1bn of first-half profits; and it had €215bn of easy-to-sell assets in times of crisis.
However, the analysts said Deutsche might still need more capital, identifying a €7bn shortfall to Cryan’s capital targets for 2018. “You will hear back from me soon. Please keep working as you have been doing so far,” he told staff, 7,000 of whom work in London.
Cryan’s message matched that of Barry Bausano, chairman of Deutsche’s hedge fund business, who has also been trying to stem any panic. Bausano told CNBC on Thursday that its prime brokerage division, which services hedge funds, was “still very profitable” but said there was “no question we have a perception issue”. With Deutsche’s shares down 50% this year, Cryan has been under pressure from some analysts to accelerate his restructuring programme to cope with the low interest rate environment. Cryan is expected to attend the International Monetary Fund meeting next week.
Deutsche’s possible penalty for mis-selling of US residential mortgage-backed securities is also driving down shares in Barclays and RBS, as they too face punishment for these activities which took place in the run-up to the 2008 crisis. Analysts at Credit Suisse said the share price reaction was overdone as the penalty would eventually be reduced from $14bn. “We have modelled €4bn for this issue,” they said, and calculated that Deutsche could afford to pay €9bn “before breaching minimum capital requirements, a comfortable cushion in our view”.
The Financial Times reported on Friday that the DoJ was aiming to wrap any settlement with Deutsche into one with Barclays and Swiss bank Credit Suisse and have it completed before the US presidential election on 4 November. Credit Suisse’s shares were off 4.5%. RBS, which could take a hit of as much as £9bn, said earlier this week it was not in settlement talks. But even once the penalty is agreed, the bank will still face investor angst. Analysts said Deutsche might still need more capital, identifying a €7bn shortfall to Cryan’s capital targets for 2018.
Fabrizio Camelli, head of the Deutsche wealth management business, told Germany’s Süddeutsche Zeitung there had not been “any noticeable outflow of client funds”. The bank has set aside €5.5bn for litigation but not all of this is for the current situation.
Deutsche is one of a number of European banks facing a possible penalty for mis-selling of US residential mortgage-backed securities, including Barclays and RBS.
The Financial Times reported on Friday that the DoJ was aiming to wrap any settlement with Deutsche into one with Barclays and Swiss bank Credit Suisse and have it completed before the US presidential election on 8 November.
Bailed-out RBS, which could take a hit of as much as £9bn, said earlier this week it was not in settlement talks.