BOND MARKET

Deutsche Bank Tests the Water

It wasn’t so long ago that Deutsche Bank seemed, in the eyes of some skittish investors at least, on the brink of collapse and in need of a state bailout.

On Monday it took another cautious step to repair the damage. Demand for Deutsche Bank bonds quickly outstripped the supply as the embattled financial institution lured back investors with a generous coupon rate.

Deutsche Bank set out to sell €1.5 billion ($1.4 billion) in five-year bonds, but investor demand rapidly soared to more than €3 billion, according to Handelsblatt’s financial sources.

“Deutsche Bank can afford everything but a flop. That’s why it was so generous to investors.”

Frankfurt Investment Banker

The reaction stands in stark contrast to last summer when Deutsche Bank even offered to buy back bonds as investors grew increasingly anxious about the institution’s financial difficulties.

At the time, Deutsche Bank faced up to $14 billion in penalties from the U.S. Justice Department over its trade in junk mortgage-backed securities in the run-up to the 2008 financial crisis.

Investors have grown more confident now that Deutsche Bank has reached a $7.2-billion settlement with the Justice Department and put the mortgage issue in the past.

“The less you have to explain, the easier it is to sell bonds,” one banker told Handelsblatt.

Deutsche Bank managed to lure back investors with a generous 1.5-percent coupon at time when solid returns are hard to come by due to low interest rates. The return is actually even higher, 1.58 percent, because the bonds sold slightly below face value.

Though Deutsche has eased investors fears for the moment, the bank hasn’t made it out of the woods yet. It is expected to post a €787 million loss for 2016 after suffering a whopping €7 billion loss in 2015.

“Deutsche Bank can afford everything but a flop,” a Frankfurt investment banker told Handelsblatt. “That’s why it was so generous to investors.”

Still struggling, Deutsche had to reach far deeper into its pockets than financial institutions such as France’s Credit Agricole, which offers seven-year bonds with a 0.57-percent risk premium.

Even the Italian bank Intesa Sanpaolo, with all the uncertainty surrounding the Italian banking sector, was paying out just 1.15 percent.

Still, the fact that Deutsche Bank could sell bonds at all is a sign that a measure of investor trust has returned.

The regional LBBW bank has praised Deutsche’s strategy under Chief Executive John Cryan, which involves cutting about a tenth of its workforce, as “credible and comprehensible.”

Ingo Frommen, an analyst at LBBW, said the five-year bonds “were suitable for conservative investors” during Deutsche’s restructuring.

 

Andrea Cünnen works at Handelsblatt’s finance desk in Frankfurt, reporting on the bond markets. Yasmin Osman covers finance with Handelsblatt’s banking team in Frankfurt. To contact the authors: cuennen@handelsblatt.com,  osman@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!