Deutsche Bank Probably Will Need Bailout to Restabilize, Analyst Says - TheStreet

Deutsche Bank (DB) - Get Report is likely to seek a capital infusion from the German government in the next month to stabilize its plunging stock price and protect depositors, Viola Risk Advisors Principal David Hendler said, adding to a growing number of analysts and investors who see a bailout as increasingly inevitable.

Intervention could come as soon as this weekend, during a three-day respite from volatile markets that includes the national German Unity holiday on Monday, Hendler said. The government's support would probably resemble the U.S. Treasury Department's rescue of Citigroup (C) - Get Report during the financial crisis of 2008, which involved a $45 billion equity injection and guarantees of risky assets.

Still, Deutsche Bank CEO John Cryan told the German newspaper Bild this week that he had not asked for government support for the bank and described it as "out of the question."

In an open letter to employees Friday, Cryan said that recent media reports that hedge funds were pulling business from the Frankfurt-based lender were "causing unjustified concerns." The bank has 215 billion euros ($241 billion) of liquidity, with a balance sheet as stable as at any point in the past two decades, he wrote.

"Deutsche Bank is going around telling the bright, cheery story all over the world, to counterparty risk managers, to corporate treasurers, to investors, and meanwhile investors are starting to pile out," Hendler, who's based in Montebello, New York, said in an interview. "It's becoming a stampede."

Global markets have been whipsawed by the Deutsche Bank speculation, partly because of concern that the lender's extensive reach might spread losses to other large banks. The German lender is one of the world's largest traders of derivatives contracts, a market that helped spread financial contagion globally during the 2008 crisis. In June, the International Monetary Fund said Deutsche Bank appears to be the most significant contributor to system-wide risks among the largest global banks.

Earlier this week, Jeffrey Gundlach, CEO of the Los Angeles-based money manager DoubleLine Capital, told Reuters that Deutsche Bank's stock will continue to fall until there is some recognition that the government will provide support. 

"It's un-analyzable," Gundlach told the news service.  

The lender's shares have tumbled by more than half this year to their lowest levels since the 1980s as worries mounted that its capital -- the buffer of extra assets that's supposed to protect depositors - might not be sufficient to meet regulatory minimums if unusually large losses materialize.

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There is "no basis for this speculation," Cryan wrote in the letter to employees. "Nor can uncertainty about the outcome of our litigation cases in the U.S. explain this pressure on our stock price."

While Deutsche Bank previously confirmed the U.S. Department of Justice is seeking as much as $14 billion to settle probes into mortgage-backed securities, the lender said it expected the final amount to be materially lower.

A Deustche Bank spokeswoman declined to comment Friday on a report by Agence France Press that the company was nearing a settlement with the Justice Department for $5.4 billion, less than half the original proposal.

Hendler said there's still so much doubt about Deutsche Bank's earnings power and the value of its assets that the stock and bond prices will remain under pressure until the government signals a willingness to step in. The bank faces several lawsuits over the alleged manipulation of foreign-exchange rates and short-term interest rates, noted Hendler, who hosted a conference call Friday to brief clients on the situation. More than 200 callers tuned in, he said, including several risk managers at large U.S. banks. 

Deutsche Bank had 5.5 billion euros ($6.2 billion) set aside to cover litigation costs as of June 30, according to a presentation in July. 

"The fundamental issue of low profitability and capital deficit remains," Credit Suisse analysts wrote Friday in a report. 

Deutsche Bank agreed earlier this week to sell its Abbey Life insurance business for 935 million pounds ($1.2 billion), in a move that will increase capital. The lender also securitized a portfolio of at least $2.5 billion of corporate loans to reduce risk and provide an additional benefit to capital.

The stock, which plunged as much as 9% in German trading on Friday, rebounded later amid speculation surrounding the settlement. The shares climbed as much as 13%, the most this month.

The lender is probably talking to big corporate and institutional clients in a bid to reassure them on the safety of deposits, while encouraging investors to continue buying its debt, according to Dick Bove, an analyst at Rafferty Capital Markets.

Meanwhile, the plunge in the stock price risks creating a self-fulfilling prophecy, in the form of a crisis of confidence, Bove said in an interview.

"Any whiff of negative news on a bank causes people to lose their minds and go absolutely crazy," Bove said. 

The German government is likely to push the Justice Department to ease up on Deutsche Bank, since the savings of Germans are on the hook and the country's economy needs the lender to continue supplying credit to corporations and retail customers, Bove said.

"Germany is not going to allow this to happen," he said. "If they do have to pay the $14 billion, they're screwed."