Hedge funds have started to pull some of their business from Deutsche Bank, setting up a potential showdown with German authorities over the future of the country’s largest lender.
As its shares fell sharply in New York trading, Deutsche recirculated a statement emphasising its strong financial position.
European regulators and government officials have kept a low profile in public over Deutsche’s deepening woes. However, in private they have struck a sanguine tone, stressing that in extremis there is scope under European regulation to inject state funds to support the bank, provided it is done in line with market conditions.
Marcel Fratzscher, head of DIW Berlin, a think-tank, said: “If push comes to shove, the German government would contribute because Deutsche Bank is the only global bank that Germany has.”
A person briefed on the situation at Deutsche said some of the bank’s hedge fund clients had imposed risk limits on the business they do with it in response to thenegative headlines swirling around the lender and the recent rise in its credit default swap prices, a key indicator of credit risk.
The reining in of risk had affected the sales and trading operations of its global markets division, this person said, but it had not seen similar moves by clients in its transaction banking or corporate finance divisions.
Deutsche has become the focal point of growing anxiety about the health of Europe’s banking system after the US Department of Justice told the bank it was seeking $14bn for mis-selling mortgage-backed securities.
Shares in the bank, which hit a 33-year-low this week, were down almost 7 per cent in New York in afternoon trading, after closing up 1 per cent in Frankfurt. Concerns about Deutsche rippled through the wider US market, sending US banking stocks down as much as 1.6 per cent, and the S&P 500 index off more than 1 per cent at one point.
After Bloomberg reported that about 10 hedge funds, including Millennium Partners, Capula Investment Management and Rokos Capital Management, had cut their exposure to Deutsche, the bank recirculated a statement, saying: “Our trading clients are among the world’s most sophisticated investors. We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the US and the progress we are making with our strategy.”
Barry Bausano, chairman of Deutsche’s hedge fund business, told CNBC it had seen outflows, but added that it had also seen inflows, characterising the moves over the past week as typical of the ebbs and flows of the prime brokerage business, which he said remained very profitable.
Most of the bank’s 200 derivatives-clearing clients made no changes. A London-based analyst noted that the €33bn of hedge fund money held by Deutsche was dwarfed by its €223bn liquidity reserves at the end of June, including cash and sovereign bonds. “They can last at least two months, more like three months, if no one deals with them,” he said.
Jeffrey Gundlach, the prominent investor and founder of DoubleLine Capital, told Reuters on Thursday that investors should “stay away” from Deutsche shares for now, calling them “unanalysable”. He said: “The market is going to push down Deutsche Bank until there is some recognition of support. They will get assistance, if need be.”
The woes of German banks were further underlined on Thursday as Commerzbank, the country’s second-biggest lender, unveiled plans to cut 9,600 jobs and scrap its dividend “for the time being” to boost its flagging profitability.
The move came as the profitability of the sector as a whole is under pressure from a suffocating combination of excess capacity and record-low interest rates.
Official concern about the state of European banks was highlighted on Thursday by the EU’s bank regulation chief who warned that Brussels was prepared to reject international plans to toughen bank capital regulations if they piled excessive pressure on the sector.
Valdis Dombrovskis, a vice-president of the European Commission, said the EU would not accept reforms that “lead to a significant increase in the overall capital requirements shouldered by Europe’s banking sector”. The US and Switzerland are among nations pushing for stricter rules in the Basel Committee on Banking Supervision as part of efforts to prevent another financial crisis.
This week, the German government was forced to deny reports that it was working on a rescue package for Deutsche as the lender’s share price tumbled.
As part of Commerzbank’s new strategy, drawn up by new chief executive Martin Zielke, the lender will replace its current four divisions with two: one serving corporate clients, the other serving retail and small business customers. The plan must still be approved by the supervisory board.
Its Mittelstandsbank, which caters to the small and medium-sized companies that make up the backbone of the German economy, will combine with its investment banking division to focus on corporate clients. Its trading activities will be scaled back in an attempt to reduce earnings volatility and the bank will push to digitalise many of its processes.
The reorganisation will prompt writedowns of about €700m, pushing the bank to a loss in the third quarter. Commerzbank still expects to make a “small net profit” for the full year, despite rising provisions from its exposure to the shipping industry, which is in the grip of a prolonged downturn.
The bank added that its core tier one capital ratio — a closely watched measure of financial strength which stood at 11.5 per cent at the end of June — had strengthened during the quarter, and would be “nearly 12 per cent” by the end of the year. Shares in the bank closed down 3 per cent at €5.81.
Alongside the 9,600 job cuts, Commerzbank also intends to create about 2,300 positions, meaning it will achieve a reduction of about 7,300 — or about a seventh — in its 50,000-strong workforce.
The job cuts will help Commerzbank trim its cost base from €7bn to €6.5bn by the end of 2020. “I am pleased that they made cost-cutting a key part of the plan, but it is a shame they didn’t go a bit further, and cut the cost base to €6bn,” said Neil Smith, an analyst at Bankhaus Lampe in Düsseldorf. “I would also have liked to see them exit their shipping portfolio sooner, and fund it by selling their stake in Comdirect.”
The restructuring will cost “in the region of” €1.1bn, Commerzbank said. To cover this, the bank will suspend its dividend for the time being — having only reinstated it last year after a seven-year hiatus in the wake of the financial crisis.
Commerzbank hopes to boost its return on tangible equity to “at least 6 per cent” by 2020. If the interest rate environment improves, the bank thinks a return of at least 8 per cent “will be achievable”. It is aiming for a core tier one capital ratio of 13 per cent by 2020.
Additional reporting by Robin Wigglesworth and Joe Rennison in New York and Stefan Wagstyl and Patrick Jenkins in Berlin
This article has been amended to clarify that Deutsche’s statement had been issued before Thursday