Deutsche Bank troubles cast long shadow over European banking

[LONDON] The turmoil swirling around Deutsche Bank AG has brought simmering concerns about the health of Europe's banks back to a boil.

Germany's largest lender extended losses to a record low this week, dragging down European financial stocks, after the US Department of Justice requested S$14 billion to settle claims tied to fraudulent mortgage-backed securities.

While the bank said it won't pay anywhere close to that amount, the dust- up fueled doubts over its capital levels and refocused investors on the industry's faults.

"One word - Deutsche," David Moss, who helps to oversee more than US$238 billion of assets at BMO Global Asset Management in London, said when asked to sum up the recent slump in European banks.

"That's the biggest thing - it's reignited the risk around regulation, fines and litigation."

Dismissing concern about the bank's finances, chief executive officer John Cryan told Bild in an interview published late Tuesday that capital "is currently not an issue," and accepting government support is "out of the question for us."

Deutsche Bank has tumbled almost 20 per cent this month, while Royal Bank of Scotland Group Plc - which also faces a looming Justice Department fine - fell 13 per cent, and Italy's UniCredit SpA slumped 12 per cent.

The Bloomberg Europe 500 Banks and Financial Services Index has declined 4.2 per cent in September, making it the worst month since June, when Britain's vote to exit the European Union roiled markets and sent bank shares plunging.

Royal Bank of Scotland will pay US$1.1 billion to settle National Credit Union Administration claims stemming from the company's sale of mortgage-backed securities to two corporate credit unions, the regulator said on Tuesday.

The settlement is substantially covered by existing provisions and will have no material impact on the RBS's CET1 ratio, the bank said in a separate statement.

European banks are grappling with tougher regulatory requirements, sputtering economic growth and negative interest rates, which squeeze lending margins and crimp investment returns.

In Italy, where banks are burdened with some 360 billion euros (S$549.64 billion) of soured loans, UniCredit is working on a plan to boost capital that may include asset sales and a stock offering, according to people familiar with the matter.

In Germany, Commerzbank AG scaled back its full-year profit goals and may announce thousands of job cuts this week, said a person with knowledge of the matter.

"We're clearly in an environment of very low rates and this is weighing on the banking industry and especially on banks like Deutsche Bank and UniCredit, that need to reinforce their capital while profitability is under pressure," said Christian Sole, who helps manage about 100 billion euros at Candriam Investors Group in Brussels.

"Unfortunately, some difficult cases are dragging down the whole sector."

Deutsche Bank, which runs Europe's largest investment bank, has struggled to adapt to an era of tougher capital requirements and diminished trading revenue.

Since laying out his strategy last October, Mr Cryan has cut risky assets, eliminated thousands of jobs and suspended dividend payments to conserve capital.

Reaching a mortgage deal would clear a major hurdle for the company, which has paid more than US$9 billion in fines and settlements since the start of 2008, according to data compiled by Bloomberg.

Still, JPMorgan Chase & Co analysts estimated that any agreement exceeding US$4 billion would raise questions about Deutsche Bank's capital position.

Hans Michelbach, a senior lawmaker in Chancellor Angela Merkel's party bloc, said it's "unimaginable" that the German government would support Deutsche Bank with taxpayer money because there would be a "public outcry." A Deutsche Bank spokesman said Monday it hasn't asked Ms Merkel for assistance and that a capital increase is not on the agenda.

"One big piece of potentially bad news has hit confidence in a space where investors were not very confident to begin with," said BMO's Mr Moss.

BLOOMBERG