Deutsche Bank and its biggest investor sought to reassure shareholders and staff of its financial strength after a ratings downgrade cast doubts on its turnaround plans.
Shares in Deutsche Bank closed at an all-time low on Thursday as the fallout from past misadventures in investment banking haunted chief executive Christian Sewing's attempt to return the lender to its corporate banking roots.
A source familiar with the thinking of the European Central Bank, which regulates Deutsche Bank, and its top shareholder HNA Group Co of China, said on Friday they supported management in efforts to restore long-term profitability.
This followed a report in the Wall Street Journal on Thursday that the US regulator viewed the lender as “troubled” last year, and a Standard & Poor's downgrade of Deutsche Bank’s credit rating to BBB+ from A- on Friday.
Meanwhile in Australia, federal prosecutors were preparing criminal cartel charges against Deutsche, as well as the country’s third-largest bank and Citigroup, over a $2.3 billion share issue. All deny wrongdoing.
Sewing, a Deutsche Bank ‘lifer’ appointed in April after the removal of former chief executive John Cryan, said in a letter to staff: “At group level, our financial strength is beyond doubt.” But he admitted the newsflow was “not good”.
S&P questioned Sewing’s ability to get Deutsche Bank back to profit by scaling back its global investment bank and focusing on Europe and Germany after three years of losses.
“We see significant execution risks in the delivery of the updated strategy amid a continued unhelpful market backdrop, and we think that, relative to peers, Deutsche Bank will remain a negative outlier for some time,” S&P said.
Credit ratings are especially crucial for a bank such as Deutsche, whose perceived health is important in winning business. Deutsche Bank is a big issuer of debt securities whose cost is highly reliant on credit ratings.
S&P had rated Deutsche Bank’s long-term credit at A-, on negative credit watch. That was one or two notches below most European competitors. By comparison, S&P rates Switzerland's UBS at A+ with a stable outlook.
Sewing also addressed US regulatory concerns following the report that said the Federal Reserve had designated Deutsche Bank’s operations as in a “troubled condition”.
The WSJ report sent Deutsche Bank’s shares down 7 percent on Thursday to their lowest-ever closing level, valuing it at $22bn. They recovered by 4 percent on Friday.
Five-year credit default swaps, a measure of the bank’s risk of defaulting on its obligations, fell by 16 basis points to 172 basis points as its shares rebounded, IHS Markit data showed.
Sewing said Deutsche Bank’s credit and market risk levels had rarely been so low, speculation it was exposed to political uncertainty in Italy was unfounded and funding plans for this year were well advanced.
Deutsche Bank was well positioned to react to excessive moves in debt markets, Sewing said, adding that a series of enforcement actions by the US Federal Reserve were principally related to weaknesses in internal controls and infrastructure.
“We have made progress in remediating them over the past year. We’re not yet where we want to be, but we are steadily getting there.”
In a rare intervention following the US reports, European banking regulators said Deutsche had made “good progress” in its efforts to address regulatory concerns.
“The bank now has a tighter management team, good capital and liquidity, and supervisors are reassured by the plans they see,” a source familiar with the ECB’s thinking said.
Chinese investor HNA Group, which controls an 8 per cent stake in Deutsche Bank, said it supported the bank’s management and its strategy.
“HNA remains committed to Deutsche Bank's long-term success and looks forward to continuing to work with the management team in support of that goal,” a spokesman for HNA said.