Deutsche Bank Admits Perception Issue as Its Shares Slump

Deutsche Bank share price was indicated down 6.2 per cent before the opening of the Frankfurt market on Friday, after Germany’s largest lender admitted that it had an image problem with investors as fresh concerns over its stability emerged. The lurch followed a media report on Thursday that a certain number of hedge funds which clear derivatives trades with Deutsche Bank had withdrawn some amount of excess cash and adjusted positions. This showed that counterparties were wary of doing business with the bank. One large hedge fund in the Asian continent had pulled out its collateral from the bank amounting to 50 million dollars in the last 2 days, while another fund that had a small amount with the bank was monitoring the situation very closely and hadn’t pulled out yet, sources said.A person with knowledge of the development said that it was common to witness fluctuations in balances among hedge fund clients, and these actions represented a very small portion of Deutsche Bank’s over 800 clients in the hedge fund business. In a statement on Friday, Deutsche Bank reiterated that its trading clients remained widely supportive. The bank said that it was confident the vast majority of it had a full understanding of its stable financial position, the present macroeconomic environment, the process of litigation in the United States and the progress it was making with its strategy.A separate Asian hedge fund source said that sophisticated investors would have already pulled out excess cash or unwound positions held at Deutsche Bank, and, thus, there wouldn’t be a massive wave of these withdrawals. A trader at a Japanese bank said they hadn’t heard any talk which said that someone stopped trading with the Deutsche bank in the interbank market. It was just some hedge funds that have stopped trading with it, he said. In other words, he added, basically they did have collaterals for most trades and the bank was reviewed daily, so the situation was a bit different from before the Lehman tragedy. He concluded that also the amount of the fine was not set yet.

Comments from the Deutsche Bank’s officials:Barry Bausano, chairman of Deutsche Bank’s hedge fund business told the media that its prime brokerage division, which serviced hedge funds, was still very profitable but said that there was no question of them having a perception issue. Head of the Deutsche wealth management business, said the bank, Fabrizio Camelli was seeking to reassure customers and had not seen any noticeable outflow of client funds. He told Germany’s Sueddeutsche Zeitung daily that no doubt some of their customers were asking what was up with Deutsche Bank at the moment. They were telling them that they were doing better than it might seem from the outside, he added.

Reason for crisis:The immediate cause of the bank’s crisis is a fine, disputed by Deutsche Bank, of up to 14 billion dollars by the US Department of Justice over its sale of mortgage-backed securities. Profits at Germany’s lenders have been compressed by the European Central Bank’s ‘money-printing policy’. They have been seeking to enhance revenue by passing on costs to the corporate customers and enhancing fees for the retail depositors.

Bank’s share market scenario:Deutsche’s shares were seen to be down 6.2 per cent in Frankfurt before market opened on Friday, after the bank’s US listed shares slumped more than 9 per cent in New York City on Thursday after touching a record low in the European market this week.

The Political ScenarioBerlin has defied planning any repeat telecast of the taxpayer-funded bailouts which Germany and other Western states witnessed during the global financial crisis. This followed a newspaper report earlier in this week that the government had made provisional plans to rescue Deutsche Bank. Politicians are hesitant to back a group disliked by many Germans due to its pursuit of investment banking overseas which resulted in billions of euros of penalties for the wrongdoing. Parliamentary budget spokesman for the ruling conservatives, Eckhardt Rehberg signaled that he would oppose any support. At the present time he would rule out any capital help. That wouldn’t be the right way to go, he told the media, echoing similar comments by Hans Michelbach, who is the head of the conservatives in the parliamentary finance committee. However, chief executive of DoubleLine Capital, Jeffrey Gundlach said that investors betting that Berlin would not rescue Deutsche Bank could find themselves nurturing big losses. The market was going to push down Deutsche until there was some recognition of support. They would get assistance, if need be, said Gundlach, who oversees over 100 billion dollars at Los Angeles-based DoubleLine. Chancellor Angela Merkel’s popularity has declined due to her open-door policy for migrants, and if Deutsche were to require state aid, her standing as the leader who successfully drove Germany through the financial crisis might also be called into question. Deutsche Bank got through the global crisis without state help, but Germany’s second-biggest lender, Commerzbank needed an 18.2 billion euro bailout in the year 2008 and the state even today holds a 15 per cent stake.

No duplication of the Lehman Brothers case:The problems of Deutsche Bank, once Germany’s flagship on Wall Street, are uncomfortable for Berlin, which has rebuked many euro zone peers for economic mismanagement and pushed for countries like Ireland and Greece to cope up with their banking problems alone. Hans Joerg Schelling, Austrian finance minister, also sought to play down fears over Deutsche Bank, saying the case couldn’t be compared with the Lehman Brothers, the US investment bank whose collapse in the year 2008 sent shock waves across the globe. He told the media that they had all the measures in place at a European level to stabilize financial markets.Like many of its peers, Deutsche Bank has also faced a series of lawsuits which often trace back to the boom years ahead of the crash. Its litigation bill since the year 2012 has already hit more than 12 billion euros or 13.5 billion dollars. In the month of July the bank barely scraped through the European stress tests (designed to gauge its ability to withstand a crisis) and has warned that it may need deeper cost cuts to turn itself around and recover.

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