By Jenny Strasburg in London and Andrea Thomas in Berlin
Deutsche Bank AG shares fell sharply Monday on investor concerns
about the German lender's capital position ahead of an anticipated
legal settlement with the U.S. Justice Department.
The shares were down 6.6% as of midafternoon in Europe, to their
lowest price in decades, according to FactSet. They were trading
near EUR10.65, marking a 53% decline this year.
The Wall Street Journal reported this month that the U.S.
Justice Department proposed Deutsche Bank pay $14 billion to settle
a set of mortgage-securities investigations. In response to the
report, Deutsche Bank said it had no intention of paying "anywhere
near" that figure and said that negotiations were just beginning.
Investors and analysts expect any settlement ultimately would be
much lower than $14 billion.
On Monday, a Deutsche Bank spokesman, Jörg Eigendorf, said the
lender is "fundamentally strong" but is suffering from "pure
speculation" in the market, which is fueling uncertainty.
Discussion of a capital increase by the bank is speculation and
"just not a question for us right now," Mr. Eigendorf said in an
interview with CNBC. He said the lender plans to solve its problems
itself, and rejected the notion that Deutsche Bank's Chief
Executive John Cryan sought help from the German authorities to
settle its U.S. legal matters.
A domestic media report over the weekend, in the magazine Focus,
suggested that Chancellor Angela Merkel has ruled out extending
state aid to Deutsche Bank before the German national election in
September 2017. The report, citing unnamed government officials,
led a spokesman for Ms. Merkel to tell reporters Monday that there
was "no need for such speculation" about state aid for Deutsche
Bank.
The spokesman said Ms. Merkel is regularly in contact with
German business leaders. He said the German government expects a
"fair outcome" from settlement talks between Deutsche Bank and the
U.S. Justice Department.
Deutsche Bank's capital woes have weighed heavily on the lender
this year. It has struggled to make money at a time when low and
negative interest rates are hurting banks' profitability. Deutsche
Bank's plight is worsened by the threat of a larger-than-expected
Justice Department fine tied to its role issuing residential
mortgage-backed securities leading up the financial crisis.
Analysts have noted that a fine of even half the Justice
Department's opening bid could prompt a capital increase by
Deutsche Bank, a move the bank has repeatedly said it plans to
avoid.
But executives face some time pressure from investor
expectations. Mr. Cryan and his lieutenants have said they want to
settle big-ticket litigation, including whatever U.S.
mortgage-probe fine the bank might have to pay, this year if
possible.
Even a $4 billion settlement "would put questions around capital
position," J.P. Morgan Chase & Co. analyst Kian Abouhossein
said in a research note this month.
Deutsche Bank held $6.2 billion in litigation reserves as of
June 30. Analysts had been estimating a Justice Department
settlement between $2 billion and $5 billion, while also saying
that the process is opaque. Previous deals that banks have struck
in parallel mortgage-backed securities probes aren't necessarily
reliable indicators, lawyers say.
Any issuance of new shares would dilute holdings of existing
shareholders, and would be particularly painful given already-steep
share declines.
The bank's riskiest debt securities also have slumped: Its $2
billion worth of 6% instruments known as additional Tier 1 debt
fell about 2 cents Monday, to around 73 cents on the euro,
according to Tradeweb data. They're trading near levels they hit in
February, when Deutsche Bank faced a wave of capital concerns and
offered to buy back billions of dollars of its senior debt as a
show of confidence.
So-called AT1s have helped Deutsche Bank boost capital levels
but would be first to absorb losses in case of failure. Interest
payments on the AT1s are optional, and Deutsche Bank has repeatedly
assured investors this year that it expects to have sufficient
funds to pay interest on schedule in early 2017.
The news of the Justice Department's $14 billion opening bid in
settlement talks has rekindled concerns about the solidity of that
funding, analysts and investors say.
For months the lender has been trying to shrink and cut costs in
an effort to boost its capital to meet tougher regulatory hurdles
ahead. It has been seeking to sell businesses as part of a strategy
unveiled by Mr. Cryan in October 2015. But those goals have also
been challenged by tougher market conditions and other
complications.
One deal that the bank has announced, in late December 2015,
involves the sale of its roughly 20% stake in Hua Xia Bank, a
listed company in China. Deutsche Bank initially said it expected
the roughly $4 billion deal, involving the sale of the stake to a
Chinese insurer, to close by the end of the second quarter, but in
July extended that timeline to the end of the year, saying a
three-month review by Chinese regulators would wrap up on Sept.
24.
That date passed with no announcement. Deutsche Bank has told
investors in recent days it still expects the stake sale to close
by the end of the year. Any questions about the deal wouldn't
normally by themselves stoke concerns, investors say. But the sale
is just one step among many Deutsche Bank has outlined to meet its
capital goals, which have come under increasing pressure.
A spokesman referred to statements by Marcus Schenck, Deutsche
Bank's finance chief, in July that despite the delay, the bank is
"still highly confident" in closing the Hua Xia sale by
year-end.
Monica Houston-Waesch
,
Madeleine Nissen
and Mike Bird contributed to this article.
Write to Jenny Strasburg at jenny.strasburg@wsj.com and Andrea
Thomas at andrea.thomas@wsj.com
(END) Dow Jones Newswires
September 26, 2016 11:29 ET (15:29 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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