By Evelyn Cheng
Anyone waiting for a government rescue of Deutsche Bank shouldn’t expect one just yet.
The consensus of analysts who spoke with CNBC is that no government rescue is imminent, or even necessary yet, for the imperiled German financial institution, despite Deutsche Bank shares hitting all-time lows Monday. The stock was down 1 percent Tuesday.
“I don’t think the share price per se is going to be the deciding factor in this,” said Piers Brown, a London-based analyst at Macquarie, which has an underperform rating on the stock.
The German government view is that Deutsche Bank is “adequately capitalized,” he said, especially given that it passed a stress test from the European Banking Authority this summer. “I don’t think there’s any basis for them to step in.”
Deutsche Bank is grappling with a string of problems that are concerning shareholders. Photograph by Kai Pfaffenbach for Reuters
German Chancellor Angela Merkel has ruled out state aid for the country’s largest lender, Germany’s Focus magazine reported Friday, citing government sources. The report heightened investors’ concerns that the bank cannot pay a U.S. Department of Justice demand for $14 billion to settle claims related to the bank’s selling of mortgage-backed securities. Deutsche Bank shares fell 7 percent in New York trade Monday to $11.85, far below the 2009 financial crisis low of near $18 a share.
“As we see in Italy, if there’s a need for a ‘bail-in,’ authorities will ask for a private solution. I don’t think they’re near any situation where this is required.”
Market analysts still expect European authorities to support Deutsche Bank in any extreme case. But the stock’s reaction to the report from the weekend is seen as indicating that the German government will not necessarily provide support in a way that benefits shareholders.
“If there were ever a situation where a German bank needs assistance, first (its) own capital base needs some haircuts, then primarily an underwritten rights issue,” said Holger Mertens, head portfolio manager, global credit, at Nikko Asset Management. A rights issue, which gives existing shareholders the right to buy more shares, initially reduces the value of each share.
Mertens also said that in Europe there’s a preference for “bail-ins,” in which a bank’s creditors and depositors take a loss on their holdings, as opposed to a bailout, where the government injects public money.
Italian banks have taken most of the headlines on Europe’s ongoing bank troubles, and one of the steps for helping Italian banks with bad loans was the recent creation of a private fund that was sponsored by the Italian government.
“As we see in Italy, if there’s a need for a ‘bail-in,’ authorities will ask for a private solution. I don’t think they’re near any situation where this is required,” Mertens said.
Does Deutsche Bank put the whole system at risk?
Deutsche Bank still maintains its independence from the government and said Monday that it had not asked for any help. The bank has also said it will fight the $14 billion settlement figure, and most analysts expect the final settlement figure to be much less than that. A German government spokesperson said Monday there was no need to speculate about state aid for the bank.
But the concern about Deutsche Bank is its great potential for systemic risk to global financial systems, as the International Monetary Fund stated in a report earlier this year. Monday’s decline in the share price dragged down stocks globally, with the STOXX Europe 600 Banks index falling more than 2 percent in its worst day in more than a month, and the U.S. SPDR S&P Bank ETF (KBE) down 2 percent in its worst day since July 5.
“This stock is in free fall until management (makes a change),” said Ryan Mendy, COO at The Edge, a spinoff consulting group. He said the solution for Deutsche Bank’s financial struggles is separating operations into three different businesses — commercial retail, investment banking and asset management — which could eventually be purchased by other banks.
Deutsche Bank has declined to comment to CNBC on the possibility of any sort of restructuring.
In the meantime, Friday’s report on Merkel highlights the complex, politicized nature of Deutsche Bank’s challenges.
“The German government ruled out state aid, but I don’t think anyone thought that Germany was going to” bail out the bank, said John Kay, visiting professor of economics at the London School of Economics and author of “Other People’s Money.”
“Politicians have made firm statements against future bailouts. What that means is any support is going to be in the less obvious ways,” he said, pointing to the European Central Bank as a possible source of assistance, should it come to that.
“The problem is that to bail out Deutsche Bank is to violate every principle [Merkel has] spoken of since 2008.”
The greater challenge facing the European Central Bank and Germany’s government is growth. Issues such as migration and unemployment could become greater priorities for authorities than stemming Deutsche Bank’s decline — especially as Berlin has stringently imposed austerity on smaller, struggling members of the European Union, especially Greece.
“Everyone’s focusing on this as an economic problem. The situation of Deutsche Bank is a political problem,” said George Friedman, chairman of Geopolitical Futures, an online publication that explains and forecasts the course of global events. “The problem is that to bail out Deutsche Bank is to violate every principle she’s spoken of since 2008.”
And in the eyes of some analysts, the bank may not need a capital injection anyway at this point.
“For Deutsche Bank as well as all other European Banks, the situation is not a solvency problem or a liquidity problem.” Mertens said. “It’s a problem of profitability.”
For bondholders like himself, “we can still find comfort” that there’s little sign Deutsche will default on its debt.
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