Germany’s biggest bank on Monday reassured investors that it has sufficient funds after the shares plunged the most in almost seven years, eroding almost €2 billion ($2.2 billion) in market value. Deutsche Bank rebounded after it said in a statement that it’s able to meet obligations on its additional Tier 1 notes both this year and next, with chief financial officer Marcus Schenck telling employees the capital position remains “strong."
Co-chief executive officer John Cryan is struggling to convince investors that he’s able to boost capital buffers and profitability by cutting costs and eliminating thousands of jobs as volatile markets undermine revenue and outstanding regulatory probes raise the spectre of continued legal charges. The cost of protecting Deutsche Bank’s debt against default has more than doubled this year, while the shares have dropped about 38%.
“Investors are worried we’re in for a financial crisis reloaded and that banks have risk on their books," said Philipp Haessler, an analyst at Equinet AG with a neutral recommendation on Deutsche Bank’s shares. “The developments at Deutsche Bank show just how nervous investors are."
The shares jumped as much as 5.4%, the biggest intraday gain since October, and were up 0.3% at €13.87 as of 11:23 a.m. in Frankfurt.
Deutsche Bank and European rivals including Credit Suisse Group AG and Barclays Plc are getting walloped by a global market rout just as they embark on ambitious overhauls of their securities units. The selloff, as investors seek safety from China’s slowdown and falling oil prices, is complicating that task by reducing revenue from investment banking and making parts of the business more expensive to exit, hampering efforts to ultimately plow more earnings into capital.
January marked the worst start to a year for underwriting bonds in Western Europe since 2008, while high-yield bond fees slumped 78% from last year, data compiled by Freeman & Co. show. Stock sales in Europe, the Middle East and Africa dropped 60% so far this year, data compiled by Bloomberg show. Shares of the three investment banks have tumbled at least 25% since that month began, putting them in the bottom half of the 39-company Bloomberg Europe Banks and Financial Services Index.
“It’s going to be a really bad year," said Lutz Roehmeyer, who helps manage about €11 billion at LBB Invest in Berlin, which holds shares of lenders including Deutsche Bank. European banks “can essentially scrap any goals they had set themselves for this year."
Deutsche Bank said on Monday that it still has room to pay about €1 billion in 2016, enough to cover about €350 million in Additional Tier 1 coupons due in April. The estimated payment capacity for 2017 is about €4.3 billion , boosted in part by proceeds from the announced sale of a stake in Huaxia Bank Co., the Frankfurt-based lender said. The 2017 estimate is before any effect from 2016 profit or losses.
The statement did little to reverse a selloff in credit markets. The cost to protect against losses on the bank’s riskiest debt continued to climb, reaching the highest level since the height of the European debt crisis in 2011, according to data compiled by Bloomberg.
The cost of protecting Deutsche Bank’s subordinated debt rose for an eighth day. Credit-default swaps increased five basis points to 444 basis points, the highest since November 2011, according to data compiled by Bloomberg.
Deutsche Bank’s statement came after Simon Adamson, an analyst at CreditSights Inc., signalled concern about the bank’s ability to pay coupons in 2017 if operating results disappoint or litigation costs are higher than expected. A loss in 2015, driven by legal costs and writedowns of goodwill, and declining revenue from the firm’s biggest business in the fourth quarter narrowed the room for error.
Doubts about Deutsche Bank’s ability to pay coupons on Additional Tier 1 debt fuelled a selloff in the bank’s bonds and shares this year, with the stock losing about 39% of its value. The contingent convertible bonds—also known as CoCos—have turned in a similar performance as the cost of protecting the company’s subordinated debt from default for five years using credit-default swaps more than doubled since the end of 2015.
Deutsche Bank’s core long-term returns will be affected either by significant balance-sheet deleveraging or by raising capital, Berenberg analysts wrote in a note to clients on Monday.
Since taking over last year, Cryan has pledged to boost profitability by shrinking parts of the firm’s debt-trading business and by selling Deutsche Postbank AG, a German consumer lender. His efforts have been hampered by rising costs tied to past misconduct, with Deutsche Bank racking up more expenses for litigation and fines since the start of 2008 than any other financial firm on the Continent.
“Their overhaul is necessary, but it’s timing, along with litigation they face, is really the worst you could possibly imagine," said Tomasz Grzelak, a Zurich-based analyst at Mainfirst Bank AG with a neutral rating on the stock. “Investors are worried about a capital increase. They have a good buffer now but we still face the costs of litigation and restructuring."
While his predecessor, Anshu Jain, tapped investors in 2013 and 2014 to help fund growth, Cryan said in January that he doesn’t see a need to raise capital.
Credit Suisse, also under pressure to strengthen its balance sheet, tapped investors for 6 billion Swiss francs ($6.1 billion) to bolster capital last year, while Britain’s Standard Chartered Plc raised about $5.1 billion.
US lenders including Bank of America Corp. and Morgan Stanley took steps in 2011 to reassure investors amid market volatility tied to the European sovereign-debt crisis. Bank of America announced a $5 billion investment from Warren Buffett to shore up capital in August of that year, while Mitsubishi UFJ Financial Group Inc. issued a statement in October reiterating its alliance with Morgan Stanley.
“There are plenty of reasons to be critical about Deutsche Bank, but the idea of them missing a coupon payment was pretty unrealistic," Michael Huenseler, who helps manage about €17 billion including the bank’s bonds at Assenagon Asset Management, said by phone from Munich. “They’re in a very uncomfortable place with the stock hitting lows and it’s looking like we’re in the financial crisis, but the situation is very different." Bloomberg