Germany Working On Deutsche Bank Rescue Plan As Lender Sells Unit To Shore Up Liquidity

Update: In an emailed statement, the German finance ministry told Bloomberg that the report on Deutsche Bank by German weekly Die Zeit “is incorrect" adding that "the federal government isn’t preparing any rescue plans. There are no grounds for such speculation.


Only two more denials until it is unofficially confirmed.

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It's all about Deutsche Bank this morning again, where after last night's vigorous denial by CEO John Cryan, who told Bild that the troubled German lender is not seeking a government bailout and that it's balance sheet is solid, earlier this morning Germany's Zeit reported that the German government is working on a contingency plan for Deutsche Bank. The German outlet writes that possible scenarios apply in case Deutsche Bank AG needed capital injection to cover litigation costs and include the option of German government taking a stake.

Contingency plan envisages possible sales of Deutsche Bank units, with the option of state guarantees to back the transactions if needed. One worst-case scenario involving the government taking a 25% stake would apply only in extreme emergency. All options are contingency planning and German govt hopes Deutsche Bank won’t need any state aid.

Queried by Reuters, a Deutsche Bank spokesman referred to an interview Chief Executive John Cryan gave German daily Bild on Wednesday and denied the report. "At no point did I ask the chancellor for support. Neither did I suggest anything like that," had told Cryan Bild in response to a different report that said he had asked German Chancellor Angela Merkel for her support with a $14 billion U.S. demand to settle claims it missold mortgage-backed securities. Such a request would be "out of the question for us," Cryan said, adding that he could not understand how "anyone could claim that."

Despite the preemptive denial, Zeit said that the German government is still hoping Deutsche Bank will not need state support and only scenarios for a potential rescue are being discussed so far.

Of course, realizing that such an narrative could promptly trigger a counterparty, if not bank run, moments after German regulator Bafin told Reuters that it is not working on an emergency plan for Deutsche Bank two sources familiar with the situation said on Wednesday.

However, confirming the severity of the situation, earlier today Deutsche Bank also announced it had sold its Abbey Life insurance unit to Phoenix Group Holdings for £935 million ($1.22 billion) in a deal that will boost the German lender’s capital position. Deutsche Bank Chief Executive John Cryan said in a statement that the sale would allow the bank’s asset-management arm to focus on its core business and strengthen its capital position.

As the WSJ adds, the sale, while relatively small, is good news for the bank at a time of renewed investor concerns about its thin capital cushion ahead of a potential multibillion-dollar settlement with U.S. authorities over mortgage-securities probes. The looming charge has sparked concerns that the bank may need to raise fresh funds, and questions about whether Berlin might be forced to support the lender.

The bank said the Abbey Life sale will add about 0.1 percentage point to its common equity tier 1 capital ratio. However, from an income statement basis, the transaction—which is subject to regulatory approval—will result in an expected pretax loss of about €800 million ($897.2 million) because of goodwill impairment.

For Phoenix, the deal will add £10 billion of assets under management, 735,000 new policyholders and boost cash flow to support planned dividend increases. The U.K.-listed business will partly fund the deal through a £735 million rights issue. As part of the transaction, Deutsche has agreed to indemnify Phoenix to cover a potential negative outcome from a U.K. investigation into Abbey Life’s fair treatment of customers and annuity sales practices.

The bottom line: whether a bailout of Deutsche Bank is on the horizon is still up to speculation, and mostly to the market, where should pressure on the company stock and CDS continue, DB may have no choice but to active the "contingency plan." In any case, US equity futures which until the report were in the green, promptly went south of the unchanged line once the news hit as echoes of the financial crisis get disturbingly familiar.