Analysts lament Deutsche woes but play down bailout talk

The Deutsche Bank logo at a a magnificent Art Nouveau building of the Deutsche Bank in Hannover, Germany


Deutsche’s shares tanked after The Wall Street Journal reported on September 15 that the US Justice Department wanted the bank to pay $ 14 billion to settle a probe linked to the sale of mortgage securities in the run-up to the 2008 financial crisis.

Shares fell from €12.95 on September 14 to €10.55 on September 26, and have since nudged up to €10.78 as of 14.30 BST on September 29. A year before they stood at €23.51.

Deutsche Bank said at the time that it had “no intent” of settling the claims “anywhere near” that level, and analysts and fund managers expect a final settlement of less than half that opening position – closer to a “manageable” $ 5 billion.

But talk of potential capital raisings and asset sales has intensified – on September 28 Deutsche said it was selling UK insurer Abbey Life to boost its capital position – and the German government has had to deny that any bailout of the bank is imminent.

Deutsche Bank declined to comment for this article.

Analysts agreed it was too soon to be talking about government intervention. One banks analyst based in Germany said: “We’re a long way from talking about a forced bailout.”

Another equity analyst working for a large City investment bank noted: “You’ve got to bail in bondholders before you can have a government injection. That’s the tough question. Is anyone willing to do that and cause disruption in the bond market for other banks?”

Instead, he said Deutsche Bank would have to “muddle through”, although that too is “potentially a bad thing”.

“It’s bad for the Deutsche Bank share price and having a sick bank limping on is a negative for the whole banking system in Europe,” he said.

In a September 28 note to clients, Chris Wheeler, a London-based banks analyst at Atlantic Equities, said that Deutsche Bank’s CEO John Cryan would not want to pre-empt the DOJ by raising capital for risk of seeing the regulator increase its settlement claim.

He agreed that a settlement of $ 5 billion would be manageable but anything more than $ 8 billion would be a problem. He also thought a government bailout was unlikely, saying the German government “cannot just wade in and recapitalise the bank” due to difficulties under EU bail-in rules.

Wheeler explained: “On the bail-in rules, the EU now says that before government aid is provided you must first bail in (write off or convert into equity) 8% of your liabilities (ie, excluding equity). What must be bailed in is subordinated and senior debt (excluding insured deposits and covered bonds).”

However, he warned: “The complication is that DBK’s liabilities are circa €1,736 billion. So 8% is €139 billion. Additional Tier 1 [CoCos] are €4.6 billion, subordinated debt €12.5 billion… so we are still short of €122 billion!!! That means €122 billion of senior debt (wholesale funding) would have to be bailed in/written off.”

Those on the buyside are watching with concern.

One fund manager in the City of London said that, ultimately, Deutsche Bank’s fate and the chances of a large fine and subsequent German government bailout, might depend on “extremely high level” political discussions now talking place behind the scenes. He said: “If everyone starts reducing their counterparty exposure to Deutsche [that could be a systemic risk].”

He added: “I am sure that the European Central Bank is talking to all the banks around Europe about this [as Deutsche’s counterparties]… they have clearly learnt a lot from 2008-2009. I am sure these discussions are going on, which is one reason it hasn’t all gone completely crazy.”

Filippo Alloatti, senior credit analyst at Hermes Investment Management, agreed that lessons had been learnt from 2008: “The risk is important but in my opinion it is a little bit over-hyped.”

Mark Cobley and Andrew Pearce contributed to this article.

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