(Bloomberg) -- Deutsche Bank AG shares slumped to a record low and its riskiest bonds dropped amid concerns about the lender's ability to withstand mounting legal costs, with some hedge funds moving to reduce their financial exposure.
The funds, a small subset of the more than 800 clients in the bank's hedge fund business, have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News. Among them are Izzy Englander's $34 billion Millennium Partners, Chris Rokos's $4 billion Rokos Capital Management, and the $14 billion Capula Investment Management, said a person familiar with the situation who declined to be identified talking about confidential client matters.
In a memo to staff published on Friday, Deutsche Bank Chief Executive Officer John Cryan responded to what he called “media speculation,” saying that the bank's balance sheet has never been safer over the past two decades.
“Our job is to ensure that this distorted perception from the outside doesn't have a stronger impact on our day-to-day business,” he wrote. “Confidence is at the forefront of the banking business. There are market forces afoot that want to undermine this trust in us.”
The shares dropped 4.9 percent at 10.35 euros at 10:46 a.m. in Frankfurt after declining below 10 euros for the first time. The lender's 1.75 billion euros ($2 billion) of 6 percent additional Tier 1 bonds, the first notes to take losses in a crisis, fell as much as five cents on the euro to 69 cents, a record low, according to data compiled by Bloomberg. Credit-default swaps on the lender's junior bonds rose seven basis points to 537 basis points, according to CMA.
“The issue here is now one of confidence,” said Chris Wheeler, a financial analyst with Atlantic Equities LLP in London. “That's what's going on here. The thinking is ‘Deutsche Bank is fine, but there's a slim chance it might not be, so why leave my money in there?'”
How Deutsche Bank Key Metrics Stack Up as Risk Premiums Rise
While the vast majority of Deutsche Bank's more than 200 derivatives-clearing clients have made no changes, the hedge funds' move highlights concern among some counterparties about doing business with Europe's largest investment bank. Deutsche Bank's stock and debt have been under pressure after the U.S. Justice Department this month requested $14 billion to settle an investigation into residential mortgage-backed securities. The bank has said it expects to negotiate that lower, as other Wall Street banks have.
Millennium, Capula and Rokos declined to comment when contacted by phone or e-mail. The hedge funds use Deutsche Bank to clear their listed derivatives transactions because they are not members of clearinghouses.
“Deutsche has many problems, but liquidity is not one of them,” Stuart Graham, founder of Autonomous Research, said in a note, adding the bank had a liquidity reserve of 223 billion euros as of the second quarter. “There can be no doubt that Deutsche could access significant additional liquidity from the ECB, should it ever need it.”
The financial pressure on the lender is spilling over into German politics, stirring speculation Chancellor Angela Merkel's government might be forced to offer support. Cryan, who took over last year, told Bild newspaper this week that government aid was “out of the question.” Any taxpayer-funded solution for the bank's troubles would be Merkel's downfall, said the leader of Germany's biggest opposition party.
Risk Contributor
The International Monetary Fund in June said Deutsche Bank may be the biggest contributor to risk among so-called global systemically important banks. The bank has gross notional derivatives exposure of 46 trillion euros, according to an Investor Relations presentation published this month. After netting and collateral, reported derivative trading assets fall to 41 billion euros, the bank said.
“Bondholders simply don't want to own Deutsche Bank's credit,” Michael Shaoul, CEO of Marketfield Asset Management Chairman, said in an interview with Bloomberg Television. “If everybody really did start to pull their deposits from Deutsche Bank, then it becomes serious really quite quickly.”
Clients review their exposure to counterparties to avoid situations like the 2008 collapse of Lehman Brothers Holdings Inc. and MF Global's 2011 bankruptcy when hedge funds had billions of dollars of assets frozen until the resolution of lengthy legal proceedings.
‘Single-Digit Territory'
In a memo to staff outlining how to deal with client inquiries, dated Sept. 27, the bank said that customers broadly understand that “CDS are no longer a necessarily accurate reflection of counterparty risk,” according to a copy seen by Bloomberg. The bank's funding costs have remained lower than CDS spreads indicate this year, according to the note, and liquidity reserves are more than three times higher than in 2007.
Deutsche Bank has long struggled to adapt to an era of tougher capital requirements and diminished trading revenue. Cryan has already said that the lender may fail to be profitable this year, calling it a peak restructuring year, as he eliminates thousands of jobs.
“The fact that Deutsche Bank has slipped into single-digit territory is very significant,” said Michael Hewson, a market analyst at CMC Markets. “For Deutsche Bank's share price to go towards 8 euros -- I think that's perfectly feasible. If it doesn't close back above 10 euros today, I would be concerned that we could fall quite a bit lower.”
--With assistance from Nishant Kumar John Detrixhe Ambereen Choudhury Donal Griffin Jan-Henrik Förster Tom Beardsworth Abigail Moses Aleksandra Gjorgievska and Angela Cullen To contact the reporter on this story: William Canny in London at wcanny3@bloomberg.net. To contact the editors responsible for this story: Gaurav Panchal at gpanchal2@bloomberg.net, Simone Meier, Michael J. Moore
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
