Deutsche Bank shares continued sliding today after tanking on Monday due to concerns about the bank’s overall health. The stock tumbled 9.5% on Monday and declined by more than 4% today even though CEO John Cryan did his best to calm investor fears. Germany’s largest lender did say, however, that it will be able to pay the AT1 coupons that are coming due at the end of April, which is a shred of good news although not enough to stabilize the bank’s stock.
Cryan issued a statement last night saying that Deutsche Bank is “absolutely rock-solid,” but obviously investors aren’t sure about that.
JPM Asset Management in a new note states:
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
For investors, there are some complicated undercurrents at work right now. In this Eye on the Market, responses to questions from clients. The answer to all of the questions is “Yes, But”. One common message: there are multiple factors adversely impacting corporate profits and valuations, even if their impact on economic growth is more modest.
One of the questions is:
Are declines in European Tier 1 capital securities mostly a reflection of problems at Deutsche Bank?
And, in extremely odd news the bank is not raising capital, but buying back bonds…
Shares of Deutsche Bank rise briefly on FT report that says the bank is considering a multi-billion dollar bond buyback. • $DB
— CNBC Now (@CNBCnow) February 9, 2016
Good news about the AT1 coupons
RBC Capital Markets analysts note that Deutsche Bank’s ability to cover its 2015 was “obviously close” because of all the litigation and subsidiary impairments. The bank said it can cover the AT1 coupons for April because it has about €1 billion in available distributable items on unaudited German accounts for this year. The coupon payments it owes amount to €350 million, so there’s plenty of room.
The bank also confirmed that in 2017, it will have €4.3 billion in payment capacity before any impact from its 2016 earnings results. RBC analysts called that amount “relatively sizeable and of comfort,” adding that the AT1 worries caused investors to be concerned about whether the bank will have to issue more stock, which placed pressure on its shares.
RBC analysts also said it’s uncertain whether Deutsche Bank will have to deal with more litigation charges but note that the bank has €5.5 billion in reserves. They believe the concerns surrounding the bank’s stock and the resulting selloff are overdone, although they note that last night’s press release didn’t state the maximum distributable amount, or the “other limit on coupon payments.” They said that this isn’t a concern for this year because there’s a buffer of 177 basis points between the SREP CET1 ratio requirement of 10.75% and the Jan. 1 reported CET1 of 12.52% under phase-in.
Deutsche Bank the epicenter of the new banking crisis
Deutsche Bank’s riskiest bonds also plunged today, reports the Financial Times, as investors worried about possible litigation charges and restructuring costs. The German bank was at the center of a broader selloff that struck the entire Financials sector.
A report from Bloomberg highlighted that Deutsche Bank and other Eurozone banks have issued $102 billion worth of AT1 capital over about the last three years as regulators pushed them to comply with stiffer capital regulations. The report explains that credit investors gobbled up the AT1 coupons because of a lack of yield caused by the low interest rates in markets around the global.
The coupons offered a little more yield than standard bank debt because making payments on the is optional, although as the report explains, “In reality, banks will do just about anything to meet their AT1 payments: missing a payment would send a message of panic to credit and equity investors alike.”
There’s a reason Deutsche Bank is at the center of the new banking crisis though, as Cryan is attempting to reshape it during a time of market and economic turmoil. Also litigation continues to be a huge problem, and he’s unloading some of the bank’s businesses that just don’t fit with the new image. Now the bank’s shares are trading at around 35% of the tangible book value of the bank’s assets, possibly because of a lack of clarity about what’s next.
FTSE reaches lowest level in three years
As the markets roil the shares of Eurozone banks, the FTSE dipped to reach its lowest level in more than three years. Investors are concerned not only about the financial system’s health but also about danger from negative interest rates and Europe’s central banks, notes The Telegraph. Today marks the seventh day in a row that the FTSE Eurofirst index declined as European banks weighed heavily on it.
The German DAX has fallen by almost 30% from April 2015 when it set a new all-time high. MKM Partners analysts said this morning that the index is “now at a critical uptrend support line from the 2009 lows.” “Below that there is risk to the October 2014 lows at 8354 (about 5% lower),” they added.
JPMorgan analysts referred to the financial space as “un-investable so long as rates globally continue to plunge.” They also said that the concerns about Eurozone banks are “more fear and innuendo (something must be wrong if prices are behaving like this) and not actual tangible headlines.”