Deutsche Bank Credit Risk Tumbles as Sewing Pursues Timely Cuts

(Bloomberg) -- Deutsche Bank AG's efforts to turn around its struggling investment bank are gaining traction with investors.

The cost of credit insurance on the bank's riskiest debt fell for an 11th session on Monday, the longest streak of declines in more than two years, according to ICE Data Services. Swaps covering the bank's safer bonds have also fallen to the lowest in months, the data show.

The falling risk gauges indicate investors endorse Deutsche Bank's biggest makeover in years, with Chief Executive Officer Christian Sewing said to be slashing headcount by more than a fifth.

The cost of credit protection had already declined following reports last month of cuts to the U.S. business, management changes and the potential creation of a bad bank. The lender also defied analysts predictions last week by passing the Federal Reserve's latest bank stress tests.

“Deutsche Bank has too many costs and reducing those is really the only way management can make an impression on the profitability problem,” said Roger Francis, an analyst at Mizuho International Plc in London.

A Deutsche Bank spokesman declined to comment on the falling cost of credit swaps and pointed to a statement from May that said the bank is “working on measures to accelerate its transformation so as to improve its sustainable profitability.”

Restructuring Costs

The bank's junior swaps have fallen 90 basis points in the past two weeks to the lowest since April, according to ICE Data Services. That's outperformed a market average of 20 basis points on an index of junior swaps on European banks and insurers.

Contracts referencing the bank's next-riskiest class of debt, which is still subject to taking losses, have fallen to the lowest since March, the data show.

New swaps that started trading in May and insure Deutsche Bank's safest senior bonds, have fallen to a new low at 67 basis points -- 33 basis points below their initial trading level. A decline in the price of these swaps can lower Deutsche Bank's trading costs as counterparties use them as a reference for hedging.

Deutsche Bank's struggles to adapt to stricter regulation and challenging markets since the global financial crisis have turned it from a top global institution into one of the sick men of European finance. Sewing's recovery strategy follows a decision to end merger talks with hometown rival Commerzbank AG earlier this year.

“After the failed merger with Commerzbank, investors expected tough action by management and it seems they are getting just that,” said Dierk Brandenburg, head of the financial institutions team at Scope Ratings. “Cutting expenses, both internationally and in its domestic business, will be the next logical step.”

There's still a question over how much the restructuring will cost and how it will be financed, Brandenburg added.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott

©2019 Bloomberg L.P.