Deutsche Bank-panic (DB) - Get Report continued to grip European stock markets on Friday, though the stock itself recovered as CEO John Cryan attempted to reassure its more than 100,000 employees - and investors - about its capital strength.
Panic about the lender set the dominant tone for Wall Street on Thursday after Bloomberg reported that 10 hedge funds doing derivatives business with the bank had retreated. One source noted that the 10 are a tiny fraction of the 800 or so funds it works with and the number ebbs and flows every week in the normal course of business.
"Our trading clients are amongst the world's most sophisticated investors. We are confident that the vast majority of them have a full understanding of our stable financial position," the bank said.
In the memo Cryan said the hedge fund retreat is "causing unjustified concerns."
"We should consider this in the context of the bigger picture: Deutsche Bank overall has more than 20 million clients," he wrote. "It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust."
Deutsche Bank was recently up 1.4% at €10.39 after earlier crashing through the symbolically important €10.00 barrier to record lows. But the European banking sector in general remained down on Friday, and smaller rival Commerzbank was the main decliner on the Dax after announcing restructuring measures on Thursday.
In the memo on Friday, Cryan wrote that the sale of its 19.9% stake in Huaxia Bank in China for €3.7 billion ($4.1 billion) "will be finalized soon."
Deutsche Bank has previously said that the sale will lift its common equity Tier One capital ratio by 40 basis points from 10.8%. Credit Suisse said the booster could be up to 50 basis points.
"We fulfil all current capital requirements and our restructuring is well on track," noted Cryan. "We have significantly decreased our market and credit risk in recent years. At no point in the last two decades has the balance sheet of Deutsche Bank been as stable as it is today."
And he noted that liquidity reserves of €215 billion give the bank a "comfortable buffer."
Deutsche Bank stock had fallen 6.7% in New York on Thursday.
Credit Suisse analysts, who have an underperform recommendation on the stock, said yesterday's price action overstates the risk stemming from the $14 billion fine the Department of Justice has threatened to levy on the bank for misselling residential mortgage-backed securities before the credit crisis. Deutsche Bank said on announcing the fine on Sept. 15 that the amount was the DoJ's opening gambit only and it fully intended to negotiate that lower.
Credit Suisse said it expects the eventual fine to be about €4 billion but it pointed to other risks ahead from different legal actions and said the lender will struggle to meet its capital targets organically. That's despite the fact that Deutsche Bank's fully phased-in common equity Tier One capital ratio at 12.2% is well ahead of the 10.75% European Central Bank requirement.