Cryan Defends Deutsche Bank as Some Clients Reduce Exposure

EghtesadOnline: Deutsche Bank AG Chief Executive Officer John Cryan rushed to shore up confidence in his beleaguered lender after concern some clients are reducing exposure to the company pushed the shares to record lows.

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01 October 2016

The bank’s balance sheet is safer than at any point in the past two decades, Cryan told staff in a memo Friday. “Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust,” he said.

Analysts also came to the bank’s defense. Stuart Graham at Autonomous Research LLP wrote that Deutsche Bank has enough readily available funds on hand to weather more than two months of severe stress, including trading clients pulling back. Goldman Sachs Group Inc. analysts led by Jernej Omahen said the lender can also access backstops from the European Central Bank, according to Bloomberg.

“Deutsche has many problems, but liquidity is not one of them,” Graham said in a note. “There can be no doubt that Deutsche could access significant additional liquidity from the ECB, should it ever need it.”

Deutsche Bank shares pared some of their losses of as much as 9 percent following Cryan’s memo, trading down 2.7 percent at 10.59 euros by 2:34 p.m. in Frankfurt. The stock and riskiest bonds had been pushed lower in earlier trading after Bloomberg News reported late Thursday that some hedge funds moved to reduce their financial exposure to the bank.

The funds, a small subset of the more than 800 clients in the bank’s hedge fund business, have shifted 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 with knowledge of the situation who declined to be identified talking about confidential client matters.

“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

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.

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 were pushed lower after the U.S. Justice Department earlier this month requested $14 billion to settle a probe into residential mortgage-backed securities, sparking concerns about the lender’s financial health.

In his memo to staff, Cryan said he is taking DOJ settlements with other banks “as a benchmark,” echoing previous remarks that he expects U.S. authorities to scale back their request. Deutsche Bank has more than 215 billion euros in liquidity reserves, he said, when calling it an “extremely comfortable buffer.”

‘Inflection Point’

Commerzbank AG Chief Financial Officer Stephan Engels told Bloomberg Television on Friday that he’s “relaxed” about Deutsche Bank’s counterparty risk.

“We’re balancing on a bit on a knife, and if the customers stay loyal and they can somehow work their way through this, they make it through without some kind of help,” Steve Rattner, chairman at Willett Advisors, said in an interview with Bloomberg TV. “But there’s a possibility that they’ll need liquidity assistance.”

The financial pressure on Deutsche Bank has already spilled into German politics, stirring speculation Chancellor Angela Merkel’s government might be forced to offer support. Cryan told Bild newspaper this week that the firm doesn’t plan to raise capital and 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.

“Deutsche Bank may be a victim of speculative attacks,” said Carsten Klude, chief economist at M.M. Warburg & Co. in Hamburg. “The potential costs to settle the U.S. mortgage investigation of course triggers horror scenarios. But fears of a potential collapse are far-fetched.”

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.

Deutsche Bank, which is scheduled to publish its third-quarter earnings next month, 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 and cuts risky assets.

“The systemic problem we have is that confidence and trust are not back to the normal levels,” Lothar Mentel, CEO of Tatton Investment Management, said in an interview with Bloomberg TV. “We’re getting to a point where perhaps there’s value in the stock.”