Trading in credit default swaps – derivatives which protect against a default on Deutsche’s debts – hit a six-month high amid reports that Angela Merkel’s government is plotting emergency aid for the bank, reports The Telegraph.
The cost of insuring the bank’s sub-ordinated bonds has jumped to a record high, as trading in its CDSs rose by more than 60pc as investor nervousness heightened.
Deutsche’s chief executive, John Cryan, said state help was “out of the question”, while the German finance ministry claimed the Government “is not preparing any rescue plan, there is no reason to speculate on such plans”.
The bank has also denied it had spoken to Mrs Merkel over the summer, when she rejected the prospect of state assistance with an ongoing US regulatory investigation that may result in a $14bn (£11bn) fine.
Shares in Deutsche closed up 2pc at €10.77 after the announcement, bouncing from their lowest level in more than a quarter of a century, but are still more than 50pc lower year-to-date.
The slight fillip was also the result of a £935m boost to its balance sheet as a result of selling its Abbey Life pensions book to insurance consolidator Phoenix.
Deutsche said the long-awaited disposal of Abbey Life would add 0.1 percentage points to its closely watched common equity tier one capital ratio, which stood at 10.8pc at the end of June. Despite the near-€1bn cash windfall, Deutsche expects to book a pre-tax loss of €800m on the sale as it must write down goodwill and other intangible assets.
Deutsche acquired Abbey Life shortly before the financial crisis struck for about £1bn. While the unit remains profitable, Deutsche started to explore a sale last autumn as part of Mr Cryan’s plans to scale back the bank’s non-core operations. At the time, industry figures were discussing a sale price of up to £3bn. Shares in Phoenix, set up to consolidate old books of life insurance from other companies which now oversees the pensions of 4.5 million policyholders, rose more than 3pc in response to the Abbey Life news.
“Deutsche Asset Management will continue to focus on its core businesses of active [investments], passive [investments] and alternatives, while this transaction will also strengthen Deutsche Bank’s capital position,” said Mr Cryan. “We continue to build a simpler and better Deutsche Bank.”
Although talks with the US Department of Justice over the regulatory fine continue, Andrew Lim, a Societe Generale analyst, said that a settlement of more than €5.4bn (£4.6bn) would suggest a capital increase would be needed to pay the fine.
Jennifer McKeown, senior European economist at Capital Economics, played down the likelihood of the need for a recapitalisation, saying: “Deutsche Bank seems unlikely to collapse… it has a lot of liquid assets… its assets are also better diversified, both by sector and country, leaving it at less risk of future losses.”
She continued that if a bail-out were to be needed, “it might get around EU rules preventing bail-outs by declaring ‘exceptional circumstances’ or by encouraging a merger with Commerzbank, which is partly state-owned”.
But such a move is unlikely to be popular closer to home. The co-leader of Germany’s anti-capitalist Left party, Sahra Wagenknecht, said a bank rescue ahead of national elections next September would be fatal for Mrs Merkel’s career.
Ms Wagenknecht said if a rescue were to take place, Mrs Merkel should stand down as chancellor.
Axel Weber, chairman of Swiss banking giant UBS and a former president of the German Bundesbank, said that governments are less likely to come to the rescue of banks now than they were during the 2008 crisis because the global financial systems as a whole is more stable.
He told Bloomberg News that future interventions would be driven by the system rather than individual banks.
