Deutsche Bank (DB - Get Report) is going to be fine, because if all goes to hell the bank has €215 billion ($239 billion) in liquid assets. That's CEO John Cryan's line, at least, and that's the line of many market commentators, who either haven't caught onto equity investors' superior wisdom or represent the fast-fading voices of reason amid global panic about the lender's financial health and about possible contagion. Take your pick.
Cryan on Friday emphasized the contingency funds in a memo to the bank's 100,000 or so employees in which he said a report about the retreat of 10 hedge funds from its derivative business is causing "unjustified concerns" and blamed "forces in the markets" for trying to damage the trust that Deutsche Bank and any lender needs to do business.
"In a situation like this," he wrote, "the most important factor is our liquidity reserves. Currently they still amount to more than €215 billion ($240 billion). This is an extremely comfortable buffer. This is clear proof of how conservatively we have planned."
Mens City York Black Cole 11M New Size Kenneth Oxfords Mid On its website, Deutsche Bank said its liquidity reserves are "available cash and cash equivalents, highly liquid securities (includes government, agency and government guaranteed) as well as other unencumbered central bank-eligible assets."
Mens Mid Black City Size Kenneth 11M New Oxfords York Cole According to a person familiar with the situation, about half that sum is available in cash and the other half is paper that can be liquidated quickly. Deutsche Bank's holdings of treasury notes and bonds could, for example, be sold to the European Central Bank, which has been snapping up such assets as part of its quantitative easing program.
That person also argued that the continuous comparisons with the collapse of Lehman Bros. Inc. are misleading, whether or not the German government would ever allow the country's largest lender to collapse in the same way the U.S. government allowed Lehman to go to the wall.
Lehman had far smaller liquidity reserves than Deutsche Bank, the person argued, citing the American bank's $11 billion in the second quarter of 2008, which included $6.5 billion in cash equivalents. So Deutsche Bank has more than 20 times the liquidity available to Lehman when it sank. Moreover, Lehman was a pure-play investment bank, while the German heavyweight has vast deposits from its small and medium-sized business clients. "That's a stable funding source," he said.
Mid Cole York City Oxfords Black Size Kenneth 11M New Mens In his memo of Friday, Cryan also pointed out that the bank posted a pre-tax profit of about 1% in the first half, despite the prevailing low interest rates and earned about €1.7 billion before one-time items including restructuring costs.
He argued that even the uncertainty about the size of the fine the bank would face following negotiations with the U.S. Department of Justice over its preliminary demand for $14 billion for mis-selling mortgage-backed securities does not explain the pressure on the bank's stock price, "if we take the settlements of our peers as a benchmark."
Cryan's statement follows the bank's earlier reassurance, following the reported hedge fund withdrawal the previous day, that: "We are confident that the vast majority of [our trading clients] have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the US, and the progress we are making with our strategy."
In its quarterly results for the period ending June 30, the bank said it had €599 billion of household and business deposits, while liquidity reserves amounted to €223 billion as of June 30 - somewhat higher than the amount cited by Cryan this morning. That tallies instead with the €215 billion the bank announced at the end of December 2015.
The liquidity coverage ratio for June 30 was 124% compared with 119% as of Dec. 31, the bank's internal risk target of a minimum of 105% and the European Union's minimum target for 2016 of just 70%. The EU target is set to rise to 80% in 2017 and 100% in 2018.
Mens City 11M York Kenneth Black Cole Mid Size Oxfords New Deutsche Bank's common equity Tier 1 capital ratio was 10.8 %.
Credit Suisse analysts on Friday argued that Thursday panic about Deutsche Bank on news of the hedge-fund retreat was overblown. But they said Deutsche Bank will nevertheless need to raise funds. They argued that even if Department of Justice residential mortgage-backed securities litigation is settled at reasonable levels, other risks, including Russian trades and foreign exchange litigation, loom.
"The fundamental issue of low profitability and capital deficit remains," they noted, and argued that Deutsche Bank will likely "struggle to meet its capital targets organically. That's especially if the sale of its big retail operation, Postbank, is delayed due to a low price in a low interest rate environment.
(Deutsche Bank postponed plans to sell part of Postbank in an IPO this year but Cryan insisted earlier this week it could shed the unit at a moment's notice if it gets the right price).
The capital target Credit Suisse referred to is a fully loaded common equity Tier 1 ratio of 12.5% in 2018. That implies a capital shortfall of nearly €7 billion over the next two years. Regulatory requirements will rise at the same time, so that the 2018 target will only be 25 basis points above the minimum Tier 1 ratio of 12.25% that year.
Axiom Alternative Investments said: "On the capital front we think that the bank needs to raise capital, but not urgently: equity is well above the regulatory minimum. But it added that "the problems will accumulate gradually and the trajectories of CET1 and required capital will eventually cross each other."
Deutsche Bank has, for its part, repeatedly ruled out a capital call.
On Friday Deutsche Bank's stock sank to a low of €9.90 in early trading, down 3.5% on Thursday's closing price of €10.25, before rallying on Cryan's remarks to a morning high of €10.48. By early afternoon, the shares were trading at €10.36, up 1.1% on Thursday's close.
Meanwhile, technical analyst Ed Ponsi of Real Money Pro -- our subscription-only site for active traders and professional investors -- wrote Friday that a single chart could have shown you years ago to stay away from Deutsche Bank. Click here to sign up for a free 14-day Real Money Pro trial and check it out.