As reported over the weekend, in an unexpected announcement Angela Merkel announced that she has ruled out state aid for Deutsche Bank, and the market reaction has been swift and brutal, with the bank's shares tumbling to a new all time low, sliding more than 6% this morning to €10.70, amid concerns that mounting legal bills, including a looming fine over its pre-crisis mortgage bond business, may force the lender to raise capital.
As has been extensively documented here, in just 2016, the bank has lost over half of its value.
The 38-member Bloomberg Europe Banks and Financial Services Index slipped 1.5 percent, with Deutsche Bank the worst performer.
The company's contingent convertibles have been likewise dragged down. The lender’s 1.75 billion euros of 6 percent additional Tier 1 bonds, the first notes to take losses in a crisis, fell about 2 cents on the euro to 73 cents, near a seven-month low, according to data compiled by Bloomberg.
Just as important, DB's CDS are surging, sending the bank's default risk higher, and at 245bps DB is now the widest name in the Markit iTraxx index.
Quoted by Bloomberg, Daniel Regli, an analyst at Main First, said that “clearly headlines around the DoJ settlement and those $14 billion continue to weigh on the stock. Nobody believes that they will end up paying that amount, but for some investors it might be a concern that even the German government is discussing Deutsche Bank’s situation."
For those who missed it on Saturday, chancellor Angela Merkel ruled out state aid for Deutsche Bank ahead of national elections in September 2017, Focus magazine reported last week, citing unidentified government officials. The German leader also declined to step into the bank’s legal imbroglio with the Justice Department, the magazine reported.
Germany’s biggest bank would be “significantly under-capitalized” even assuming enough provisions to cover the settlement in the mortgage securities case, Andrew Lim, an analyst at Societe Generale SA, said in a note earlier this month. A settlement range of $3 billion to $3.5 billion would leave the bank room to settle other legal issues, while any additional $1 billion in litigation charges would erode 24 basis points in capital, JPMorgan Chase & Co. analysts wrote.
Meanwhile, the government is stepping its rhetoric, with Merkel’s government saying it sees “no grounds’’ for speculation over state funding for Deutsche Bank, top spokesman, Steffen Seibert told reporters in Berlin moments ago, adding that there "are no grounds for such speculation" Seibert tells reporters in Berlin. "The government won’t participate in any such speculation."
Seibert responded to report in Focus that Merkel has ruled out state assistance for Deutsche Bank. Merkel regularly meets German banking executives, Seibert says, declines to confirm a meeting with Deutsche Bank CEO John Cryan. Seibert reiterates Germany expects a "fair result" in Deutsche Bank talks with U.S. authorities.
Not everyone is sad this morning, however: short sellers have renewed their wagers against the bank. Bearish bets rose to 3% of shares outstanding on Sept. 22 from almost a three-month low of 1.7% on Sept. 16, according to data compiled by Markit Ltd. At this rate, many more short sellers are expected to join the fray.