Deutsche Bank (DB) shares were active Monday as German financial sector stocks rallied on the back of global inflation concerns and investors continued their careful return to the country's biggest lender despite any tangible sign of progress with U.S. authorities on its potential $14 billion mortgage selling fine.
Shares in the bank were quoted at €12.25 per share in late Monday trading, up around 0.25% on the session and outpacing full-day declines for the broader DAX performance index. Rival lender Commerzbank (CRZBY) was also a rare upside mover in the index, rising around 0.5% to €5.72 per share, while Allianz (AZSEY) led the sector advance with a 0.69% gain.
Germany's Welt am Sonntag newspaper reported Sunday that Deutsche Bank could slim down its U.S. operations in conjunction with a positive settlement with the U.S. Department of Justice while Bloomberg cited sources suggesting CEO John Cryan would implement an "across-the-board" hiring freeze in order to cut costs and boost shareholder confidence.
The various reports, however, have failed to ignite any sustained advance in the bank's shares, which have gained around 6% so far this month but are down some 25% since the beginning of June.
Ultimately, the bank's near-term prospects are going to be dictated by the kind of settlement Cryan and his colleagues can reach with the DoJ, which told the bank of September 14 that it was seeking $14 billion in connection with its selling and underwriting of mortgage backed securities in the run-up to the global financial crisis.
Deutsche Bank said at the time of the DoJ demand that it expected to pay a fine similar to that of its "peer banks", a figure that could equate to the $17 billion Bank of America (BAC) agreed in 2014 or the $5.1 billion negotiated between the DoJ and Goldman Sachs (GS) .
Analysts have pegged Deutsche Bank's litigation reserves at around €5.5 billion ($6 billion).
However, the DoJ settlement isn't the only legal hurdle the troubled lender may have to clear. Earlier this month, Reuters reported that Germany's financial regulator, BaFin, had found no evidence that the bank had broken money laundering rules in relation to its business in Russia, but noted that an earlier set-aside of around $785 million may not be enough to cover potential litigation in relation to so-called "mirror trades" that may have allowed clients to breach U.S.-led sanctions against Russia during its 2014 conflict with the Ukraine.
Furthermore, the potential legal burdens are merely a distraction to the bank's larger business and balance sheet concerns. As TheDeal reported on October 10, Deutsche Bank has E67 billion in equity against assets of E1.6 trillion, giving it a leverage ratio of around 25 to 1, the kind you would typically have seen in a hedge fund prior the Lehman Brothers collapse in 2008.
The bank also has a reported - in its 2015 annual statement - derivatives exposure of $42 trillion, although that is a notional figure that is both much larger than its actual risk and much lower than the $59 trillion it reported in 2011.
Still, with slow growth in its core European markets and the consist signalling from the European Central Bank that key interest rates will remain low for at least the next two to three years, lending isn't likely to generate the kind of equity returns need to seduce shareholders to give the bank yet another chance.
Deutsche Bank will thus need to quickly define its legal and balance sheet liabilities if it wants to start talking to its investors - and the media - about something that doesn't involve lawyers.