Deutsche Bank Extends Losses Near Record Lows: "Significantly Undercapitalzied... Even Without Bad Outcomes"

Things are going from worse to worst once again for Deutsche Bank as equity and credit markets deteriorate further as analysts warn Germany's biggest (and the world's most systemically dangerous) bank would be "significantly undercapitalized" even if an eventual settlement with the DoJ can be covered by the bank's reserves. Despite multiple capital raises over the past few years, as Bloomberg notes, any likely settlement would imply a capital increase - just to pay the fine.

Deutsche equity down another 3% this morning, near record lows...

As Bloomberg reports, 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.

 

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“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.

But CoCos (the most likely investment vehicle to get hit should further problems emerge) continue to plunge, as 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.


Deutsche Bank has raised 31.7 billion euros through three capital increases since the global financial crisis erupted and was among the worst-capitalized lenders in European stress tests earlier this year. Though the bank said it will seek to negotiate a lower settlement, 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.