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Bloomberg
Deutsche Bank AG extended losses as analysts signaled that the German lender’s capital position will be eroded by mounting legal costs such as charges for a U.S. penalty tied to faulty securities.
The shares fell as much as 2.6 percent in Frankfurt trading and were 0.9 percent lower as of 11:44 a.m., pushing the loss for this year to 47 percent. The U.S. Department of Justice opened negotiations with a demand for $14 billion to settle a dispute over mortgage-backed securities, more than twice the 5.5 billion euros ($6.1 billion) the bank had set aside for all legal disputes at the end of the first half.
Germany’s biggest bank would be “significantly undercapitalized†even if an eventual settlement with the DoJ can be covered by the bank’s reserves, Andrew Lim, a Societe Generale analyst, said in a note to investors Monday. Any settlement above 5.4 billion euros would imply a capital increase is needed just to pay the fine, he wrote.
Though the bank said it will seek to negotiate a lower settlement, shares tumbled 8.5 percent on Friday amid concern that the penalty will exceed what the bank set aside. Deutsche Bank still has to deal with a probe of its equities business in Russia and is struggling to sell its German retail lender Deutsche Postbank AG.
“Even without bad outcomes on litigation, the capital position is precariously thin in the event of a failure to sell Postbank,†said Piers Brown, a Macquarie analyst with an underperform rating on the stock. The cost of the Russian case could also be high, he said.
The bank’s 1.75 billion euros of 6 percent additional Tier 1 bonds, one of the first notes to take losses, were little changed after falling 5 cents to 77 cents on the euro on Friday, a record one-day drop. The notes reached a low of about 70 cents in February. The Bloomberg Europe Banks and Financial Services Index rose 1.3 percent, paring annual losses to 23 percent.
Deutsche Bank has raised 31.7 billion euros through in three capital increases since the global financial crisis erupted and was among the worst-capitalized lenders in European stress tests earlier this year. JPMorgan analysts wrote in a note to clients that a U.S. settlement of $3 billion to $3.5 billion would leave the German lender room to settle other legal issues. Any additional $1 billion in litigation charges would erode capital by 24 basis points. The bank’s common equity Tier 1 ratio stood at 10.8 percent at the end of June.