Deutsche Bank troubles cast long shadow

FRANKFURT • The turmoil swirling around Deutsche Bank 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 United States Department of Justice requested US$14 billion (S$19.1 billion) to settle claims tied to fraudulent mortgage-backed securities.

While the bank said it will not pay anywhere close to that amount, the dust-up fuelled doubts over its capital levels and refocused investors on the industry's faults. "One word - Deutsche," said Mr David Moss of BMO Global Asset Management in London, 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 John Cryan told Bild in an interview published on 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 - which also faces a looming Justice Department fine - fell 13 per cent, and Italy's UniCredit 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.

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 (S$549.4 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 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 Mr Christian Sole, who helps manage about €100 billion 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.

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A version of this article appeared in the print edition of The Straits Times on September 29, 2016, with the headline 'Deutsche Bank troubles cast long shadow'. Print Edition | Subscribe