DB Deutsche Bank Aktiengesellschaft

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 closed down 7.5% in European trading, at EUR10.55, their lowest price in decades, according to FactSet. They have declined 53% this year, whittling Deutsche Bank's market value to $16.4 billion.

European bank stocks broadly fell Monday. The Stoxx Europe 600 Banks index declined 2.3%. The index is down 24% 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.

On Monday, Citigroup banking analysts said it is a question of when, not whether, Deutsche Bank needs to raise capital. "It may choose to wait until litigation issues have been resolved, but the further the share price falls, the more dilutive a capital raise becomes (and vice versa), " the Citigroup analysts said in a note.

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 14:19 ET (18:19 GMT)

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