(Bloomberg) -- Deutsche Bank AG has plenty of readily available funds even if some clients pull deposits, according to analysts, responding to a drop in the bank's shares after some hedge funds reduced their exposure.
Deutsche Bank has enough liquidity to handle more than two months of severe stress, including trading clients pulling back, Stuart Graham, an analyst at Autonomous Research LLP wrote in a note Thursday, citing the bank's filings. Prime brokerage deposits of hedge funds probably only provide 3 percent of the bank's funding, and the company has access to additional backstops from the European Central Bank, Goldman Sachs Group Inc. analysts led by Jernej Omahen said.
Amid mounting concern about Deutsche Bank's ability to withstand pending legal penalties, about 10 hedge funds that do business with the German lender have moved 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.
“Deutsche has many problems, but liquidity is not one of them,” Graham wrote.
The Frankfurt-based lender had 223 billion euros ($249 billion) in its liquidity reserves at June 30. The company's liquidity coverage ratio, which is the amount of cash and easy-to-sell assets divided by an estimate of potential outflows in a 30-day period, was 124 percent, above the minimum 100 percent regulators demand.
‘Fast Depleted'
“It is not a matter of available liquidity, at least for now, but of irreversible damage to confidence in the bank,” Miguel Hernandez, Geoffroy de Pellegars and Marco Busin, at BNP Paribas SA wrote in a note to clients. “Past experience shows that customer trust can disappear quickly and, past a certain point, liquidity reserves can be fast depleted.”
Deutsche Bank Chief Executive Officer John Cryan said in a letter to staff on Friday that the lender's balance sheet is safer than at any point in the past two decades and there is “no basis” for media speculation on clients leaving.
The bank's shares fell 5.4 percent to 10.28 euros at 10:27 a.m. in Frankfurt. The stock is down more than 54 percent this year.
Many of the analysts differentiated between what they saw as overblown fears about liquidity and legitimate concerns about the bank's ability to generate capital.
Raise Capital?
A loss of client revenue has the potential to force the bank to raise capital in a “worse-case scenario,” JPMorgan Chase & Co.'s Kian Abouhossein wrote in a note Friday. Deutsche Bank will probably struggle to meet its 2018 capital targets organically, even if it doesn't pay a dividend this year or next, Credit Suisse Group AG analysts led by Jon Peace wrote.
Questions about the bank's capital position have reignited after the U.S. Department of Justice requested $14 billion to settle claims the firm sold fraudulent mortgage-backed securities. Deutsche Bank has said it won't pay anywhere near that amount, which is quadruple what some analysts had estimated for the fine. Autonomous's Graham said there may be a silver lining in the latest bout of concern.
“Perversely, a liquidity panic could even strengthen its bargaining hand with the DOJ,” Graham wrote. “Does the DOJ want to run the risk of being branded by European leaders as responsible for inadvertently bringing down the fourth most systemic bank in the world? Logically not.”
--With assistance from Tom Beardsworth To contact the reporter on this story: Michael J. Moore in London at mmoore55@bloomberg.net. To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Jon Menon, Michael Shanahan
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