Stock Plunges

Report: Merkel Denies Aid to Deutsche Bank

Deutsche Bank Montage 2 source Arne Dedert DPA ceo john cryan-montage
Tough times for Deutsche Bank's CEO John Cryan.
  • Why it matters

    Why it matters

    Deutsche Bank’s restructuring plan might come too late to keep investors confident the bank can turn its fortunes on its own.

  • Facts

    Facts

    • Last week, the U.S. Department of Justice said Deutsche Bank was far more fragile than its competitors, with a relatively low cushion against shocks.
    • The U.S. watchdog is demanding Deutsche Bank pay $14 billion to settle a case involving the sale of mortgage-backed securities during the financial crisis.
    • Deutsche Bank has already shelled out more than $10 billion in regulatory fines and settlements over the past few years, including $2.5 billion to settle a LIBOR rate-fixing investigation.
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Shares of Deutsche Bank hit an all-time low on Monday, falling as much as 6.8 percent, after Focus magazine over the weekend reported that Chancellor Angela Merkel had ruled out government aid for the bank.

Deutsche Bank’s new nadir highlights investor concerns about its ability to overcome thousands of legal cases and reorganize to become sustainably profitable. Its shares have fallen 53 percent in the last year, as the German blue-chip Dax Index has risen 10.6 percent.

Even though a spokesman for Ms. Merkel and the bank denied the report, the bank’s shares tumbled, reflecting the worry surrounding an institution hobbled by legal costs and penalties from cases that stretch back a decade or more.

Record lows are hardly new for Deutsche Bank these days. Earlier share price lows were reached last month and in February of this year. At 2:45 p.m. in Frankfurt, the bank’s shares were trading down 5.4 percent at €10.74.

Much of the recent decline stems from the bank’s onoing legal woes.

John Cryan, a former UBS banker who helped turn that bank around, was put at the helm of Deutsche Bank last year and has made it a priority to settle important legal cases and restructure the bank. He plans to cut 15,000 of jobs and close operations in 10 countries.

“I can't imagine that the German government would not be willing to prevent a second Lehman case from happening”

Markus Riesselmann, Independent Research

None of that has helped calm investor concerns. The bank lost €6.8 billion last year. Monday’s stock price skid was precipitated by fears that the Frankfurt-based bank would be unable to pay a $14 billlion fine sought by the U.S. Department of Justice related to mortgage securities improprieties.

The U.S. authorities have proposed the fine to penalize Deutsche Bank for the sale of dubious mortgages in the U.S. market in the runup to the 2008 financial crisis.

Ms. Merkel has declined to intervene to help Germany’s largest bank reach a settlement with U.S. authorities over the dubious sale of mortgage-backed securities, Focus reported Saturday, citing government sources.

While a high fine in the billions could force the bank to sell stock to raise fresh capital, Ms. Merkel has also refused financial aid for 2017, an election year in Germany, the magazine reported.

The chancellor made her position clear earlier during the summer in a confidential meeting with Mr. Cryan, according to the media report.

The bank itself insists it doesn’t need help, and that Mr. Cryan has not asked Ms. Merkel for aid in solving its U.S. mortgage dispute in America.

“Deutsche Bank is committed to face its challenges on its own,” a bank spokesman said Monday.

The government also denied the report. Spokesman Steffen Seibert said there was “no reason for such speculation” and that Berlin would not take part in it.

Deutsche Bank earlier this month confirmed the U.S. Department of Justice is demanding $14 billion, or €12.5 billion, from the bank to settle the case. It is an opening offer and the final settlement could be smaller, but the case still has raised fears the bank might be unable to pay the eventual legal costs.

Nevertheless, the media report has rattled investors. Given the importance of Deutsche Bank to the wider German economy and financial system, Ms. Merkel’s reported tough stance wasn’t really expected.

“I am a bit surprised by this report,” Markus Riesselmann, a Frankfurt-based analyst at Independent Research, told Handelsblatt Global Edition. “It is difficult to believe that, if Deutsche Bank were really required to seek help, it would not receive it. I can’t imagine that the German government would not be willing to prevent a second Lehman case from happening.”

U.S. authorities let investment bank Lehman Brothers go bust in fall 2008, triggering a financial crisis that toppled other banks in the United States and Europe. Governments stepped in to keep dozens of banks afloat, injecting capital or guaranteeing assets.

“State aid cannot be ruled out, but currently I do not expect it,” Mr. Riesselmann said of Deutsche Bank’s situation. “The bank could first do other things to prevent it, for instance the sale of assets.”

A capital hike by Deutsche Bank was a possibility, according to Mr. Riesselmann. “I do see a likelihood of this occurring, but the timing will be important,” he said. “If it happens, I do not expect it this year. Here too, it will depend on the sum Deutsche Bank has to set aside for legal cases.”

A capital hike was currently not under consideration, because Deutsche Bank met all regulatory requirements, the Deutsche Bank spokesman told Reuters.

During the previous decade, Deutsche Bank grew into Europe’s largest investment bank and competed at par against Goldman Sachs, JP Morgan and other U.S. peers. However, its investment banking activities have led to numerous lawsuits since the global financial crisis in 2008 as clients and regulators questioned the bank’s operations. Over the first six months of this year, Deutsche Bank fell out of the world’s top five investment banks.

Deutsche Bank has already paid out more than €10 billion in fines and legal settlements over the past few years. Last year, it agreed to settle an interest rate-rigging scandal and accept a fine of $2.5 billion imposed by U.S. and British regulators, one of the largest ever imposed on a bank. A money laundering scandal in Russia could bring another €1.5 billion in fines.

Deutsche Bank had set aside €5.5 billion to cover litigation costs, including settlements, at the end of June. The settlement demanded by the U.S. Justice Department suggests this sum could well rise.

 

Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. Michael Maisch of Handelsblatt contributed to this report. To contact the author:  kreijger@handelsblatt.com

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