THE German government and Deutsche Bank were at pains Wednesday to quash speculation of a rescue plan for the troubled lender, in an effort to reassure investors spooked by a potentially massive US fine. The denials came after Deutsche’s share price sank to a record low this week on reports that Germany’s biggest bank had asked Berlin for help after US authorities demanded an unaffordable $US14 billion ($18.21 billion) fine over the subprime mortgage crisis.
State aid “is not on the table”, chief executive John Cryan told Germany’s biggest-selling newspaper Bild. But investors were further rattled when news weekly Die Zeit on Wednesday reported that German and EU officials were working on an emergency plan for Deutsche “if the worst comes to the worst”.
Germany’s finance ministry swiftly shot down any talk of such a bailout. “The report is wrong. The government is not preparing rescue plans. There are no grounds for such speculation,” the ministry said in a statement. Reacting to the flurry of news, Deutsche Bank’s shares gained 2.04 per cent by close of trade in Frankfurt, ending the session at 10.77 euros ($15.71), while the DAX 30 index of leading German shares gained 0.74 per cent. Uncertainty over the bank’s financial health had seen shares hit a record low on Monday, dropping 7.54 per cent to close at 10.55 euros ($15.39) and ending at the same level on Tuesday.
OFFLOADING ASSETS
Deutsche has been dominating business headlines ever since the US Department of Justice (DoJ) made its demand for the eye-watering fine earlier this month. If Deutsche is unable to negotiate the sum down to less than the $US5.5 billion ($7.15 billion) it has set aside for legal costs and fines, it could be forced to raise fresh capital on the markets, diluting the value of its shares, or weakening its balance sheet. “We expect the DoJ will treat us just as fairly as the American banks” that have settled for much less in similar cases, Cryan insisted to Bild.
Eager to show investors it was working to clean up its balance sheet, Deutsche on Wednesday announced it had agreed to offload its British insurance company Abbey Life to life insurer Phoenix Group for 1.1 billion euros ($1.6 billion), which will provide a slight boost to its capital buffer.
‘AT NO POINT’ ASKED FOR HELP
Cryan insisted to Bild that he had “at no point” asked Chancellor Angela Merkel for a rescue. But Die Zeit is to report on Thursday on plans by Berlin “if the worst comes to the worst” to sell off parts of Deutsche to other financial institutions, and possibly buy a 25 per cent stake.
Some voices in the government favour involving the European Single Resolution Mechanism, set up in the wake of the financial crisis to prevent taxpayer bailouts of failing banks, the newspaper said. In that case, creditors and customers would bear a share of the rescue costs — potentially creating fresh chaos on the financial markets.
German officials believe attempting to intercede with the US authorities could be “potentially counter-productive”, Die Zeit said in an extract sent out on Wednesday. Deutsche faces further looming problems in the shape of an investigation by New York regulators into alleged money laundering at its Russian branch.
The two cases are among the most pressing of some 8000 weighing on Deutsche, and CEO Cryan has promised to resolve them by the end of the year. The lender’s woes come as European banks complain of a harsh business environment, confronting low interest rates cutting into their profit margins, anaemic economic growth, fierce competition and high requirements on the amount of capital they must hold as a buffer against future crises.
European Central Bank president Mario Draghi rejected attempts to blame him for Deutsche’s travails. “If a bank represents a systemic threat for the eurozone, this cannot be because of low interest rates,” he told journalists in Berlin after meeting with German politicians.
In the boss’s chair at Deutsche Bank for a little over a year, Cryan has launched a massive restructuring of the Frankfurt institution and plans to slash almost 9000 jobs worldwide by 2020. Shares in the bank have lost more than half of their value since January after it booked an almost 7 billion euro ($10.21 billion) loss in 2015. Writing in The Telegraph, financial commentator Matthew Lynn said the Deutsche Bank crisis could take down Chancellor Merkel and the euro.
“Last October, the shares were at 27 euros. Back in 2007, they were over 100 euros, and even in the spring of 2009, when banks were crashing all across the world, they were still trading at close on 17 euros,” he wrote. “For most of this year they have been sliding fast. On Monday, they crashed again, down another 6pc. Its bonds have slumped as well, while the cost of credit default swaps — essentially a way of hedging against a collapse — have jumped. It all has a very 2008 feel to it.”