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Deutsche CEO tries to reassure staff as shares plunge

[September 30, 2016] By Andreas Kröner and Maiya Keidan

FRANKFURT/LONDON (Reuters) - Deutsche Bank's <DBKGn.DE> chief executive sought to reassure his staff on Friday that Germany's largest lender remained robust after its shares again fell to record lows, sending tremors through global financial markets.

Deutsche, which employs around 100,000 people, has been engulfed by crisis after a demand for up to $14 billion earlier this month from the U.S. authorities for misselling mortgage-backed securities.

The bank is fighting the fine but would have to turn to investors for more money if it is imposed in full. The German government this week denied a newspaper report that it was working on a rescue plan for the bank.

Chief Executive John Cryan's letter, seen by Reuters, addressed reports of the departure of a few hedge fund clients, blaming unfounded speculation and "certain forces" that wanted to weaken trust in the bank.

People familiar with the matter told Reuters that one large hedge fund in Asia had pulled out collateral from Deutsche amounting to $50 million in the last two days, while other sources said this had happened elsewhere, albeit on a small scale.

On Friday, Cryan sought to put the moves into perspective.

"We should look at the complete picture," Cryan said in the letter to the bank's workers, adding that Deutsche had more than 20 million customers and reserves of more than 215 billion euros.

"We are and remain a strong Deutsche Bank."

GLOBAL RISK

Deutsche is much smaller than Wall Street rivals such as JPMorgan <JPM.N> and Citigroup <C.N> .

But it has significant trading relationships with all of the world's largest finance houses and the International Monetary Fund this year identified it as a bigger potential risk to the wider financial system than any other global bank.

Worries over a major bank in Europe's largest economy and talk of a government rescue have stirred painful memories of the 2007-2009 financial crisis.

Italy, whose banks have their own troubles caused by soured loans, called for swift action on Deutsche.

"Just like the problem of bad bank loans must be solved within a reasonable time frame, so it should be for Deutsche Bank's problems," Economy Minister Pier Carlo Padoan told Italian daily La Stampa.

With Germany facing elections next year, there is little political appetite for helping a group disliked by many Germans because of its pursuit of investment banking abroad that resulted in billions of euros of penalties for wrongdoing.

German banks have found their profits squeezed by the European Central Bank's ultra-low interest rates and Commerzbank, the country's second largest lender, is cutting almost 10,000 jobs.

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Deutsche Bank CEO John Cryan addresses the bank's annual general meeting in Frankfurt, Germany, May 19, 2016. REUTERS/Kai Pfaffenbach

FALLING SHARES

Deutsche shares traded 5.2 percent lower at 10.31 euros at 1030 GMT after earlier touching a record low below 10 euros. They have lost around 55 percent of their value this year.

Deutsche's 'CoCo' bonds slumped to a record low on Friday, with the 6 percent coupon CoCo trading as low as 69.55 cents on the euro -- down from 83 cents earlier in September.

Contingent convertible bonds, known as CoCos, are converted into equity when a bank's capital level falls below a certain threshold.

Some hedge funds stand to benefit from Deutsche's share price decline, having taken "short positions" effectively a bet on the price falling further -- 3.95 percent of Deutsche's stock was out on loan as of Thursday, according to Markit data.

"It doesn't matter whether the bank is in real trouble or not, as long as people think it is, then it is bad news," said Rabobank markets strategist Lyn Graham-Taylor.

The problems of Deutsche, once Germany's flagship on Wall Street, are awkward for Berlin, which has berated many euro zone peers for economic mismanagement and pushed for countries such as Ireland and Greece to cope with their banking problems alone.

Austrian finance minister Hans Joerg Schelling this week sought to play down fears over Deutsche, saying the case could not be compared with Lehman Brothers, the U.S. investment bank whose collapse in 2008 sent shock waves around the world.

Alberto Gallo, a partner and portfolio manager with hedge fund Algebris Investments, shared that view.

"Deutsche Bank is faced with a business model profitability issue, not a solvency issue," he said.

"It will take a long time to fix the business model, but that's not the same as solvency."

(Additional reporting by Jonathan Gould, Georgina Prodhan, Kathrin Jones and John Geddie in Frankfurt, Jamie McGeever and Abhinav Ramnarayan in London; Writing By John O'Donnell; Editing by Keith Weir)

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