Deutsche Bank Jumps as Lender Said to Consider Bond Buyback 

• Cryan said in memo to staff on Tuesday bank is `rock solid’

• Shares jump as much as 11%, biggest intraday gain since 2011

Deutsche Bank AG jumped the most in more than four years as Germany’s biggest bank considers a bond buyback to help ease concerns about its funds, according to a person with knowledge of the matter.

While the bank has ample cash to make the purchases, no decision has been made and a buyback may yet be deemed unattractive, the person said, asking not to be identified because the talks are private. Such a move would focus on senior bonds and probably wouldn’t include the firm’s riskiest debt, known as CoCos, the Financial Times reported Tuesday. Renee Calabro, a spokeswoman for the Frankfurt-based bank, declined to comment.

Deutsche Bank co-Chief Executive Officer John Cryan has been seeking to reassure investors and staff that the bank is “rock solid” after the shares erased almost 2 billion euros ($2.3 billion) of the company’s market value on Monday. While the lender said on the same day that it has more-than-sufficient means to pay coupons on its riskiest debt both this year and next, the statement did little to reverse a selloff in credit markets.

“There’s a lot of concern about banks’ ability to retain earnings and lift capital ratios,” said Neil Smith, an analyst at Bankhaus Lampe KG in Dusseldorf, who has a buy rating on the shares. “With ample liquidity, it makes perfect sense to buy back debt, especially for banks like Deutsche Bank, which are shrinking their balance sheet.”

The shares soared as much as 11 percent, the biggest intraday gain since October 2011, trading at 14.74 euros at 10:08 a.m. in Frankfurt. The bank has lost about 36 percent of its value this year.

“It seems like they’re not happy with the way their debt is trading and they’re
going to show the market,” said Bryan Dooley, senior portfolio manager at LOM Asset Management in Hamilton, Bermuda, which manages about $1 billion, including Deutsche Bank preferred securities. “Why not go into the market and retire that debt?”

Deutsche Bank has about 53.8 billion euros ($60.8 billion) of senior debt outstanding, according to data compiled by Bloomberg. The weighted average maturity of its 144 billion euros of debt is six years.

Cryan, 55, told employees in a memo on Tuesday that the firm has ample “capacity and commitment to pay coupons to investors” who hold its CoCos, also known as additional Tier 1 capital. That came only hours after Chief Financial Officer Marcus Schenck released a statement, saying the bank’s capital and risk position “remains strong.”

Bonds Drop

Such reassurances have done little to reverse declining prices on the bank’s debt.

Its bonds fell 2.55 percent from the start of the year through Monday on the Bank of America Merrill Lynch Euro Senior Banking Index, compared with a 0.49 percent gain for the benchmark. Its shares have tumbled about 41 percent in Frankfurt so far this year, while the cost of protecting the lender’s bonds from default has more than doubled.

On Tuesday, the cost of insuring its senior debt with credit-default swaps dropped 3.7 basis points to 233.1 basis points, according to prices compiled by Bloomberg based on New York closing prices. That marked the first decline since Jan. 28.

The swaps, which become more expensive as investor confidence deteriorates and cheaper as it improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Deutsche Bank’s $1.5 billion of 4.5 percent subordinated notes due April 2025 have fallen 9.8 cents since the start of the year to 82.56 cents on the dollar to yield 7.1 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those bonds traded as low as 79.98 cents earlier Tuesday.

Market ‘Tantrum’

In its statement seeking to ease concerns about keeping up with its riskiest debt, Deutsche Bank said it has room to pay about 1 billion euros in 2016 — enough to cover about 350 million euros in additional Tier 1 coupons due in April. The estimated payment capacity for 2017 is about 4.3 billion euros, boosted in part by proceeds from the announced sale of a stake in Huaxia Bank Co., the lender said. The 2017 estimate is before any effect from 2016 profit or losses.

Deutsche Bank would probably benefit most from focusing on its turnaround and reacting less to the market’s swings, according to Chris Whalen, senior managing director at the Kroll Bond Rating Agency.

“The market’s just throwing a tantrum,” he said. “If I were the head of Deutsche Bank, frankly I would try not to react to all of this. They have to stay focused on what they’re trying to achieve.”

‘Liquidity Question’

Since becoming co-CEO last year, Cryan has pledged to boost profitability and raise capital buffers by shrinking parts of the firm’s debt-trading business and selling Deutsche Postbank AG, a German consumer lender. His efforts have been hampered by rising costs tied to past misconduct, with Deutsche Bank racking up more expenses for litigation and fines since the start of 2008 than any other financial firm on the Continent.

Deutsche Bank’s common equity Tier 1 ratio, a measure of financial strength, fell to 11.1 percent at the end of 2015 from 11.5 percent at the end of September.

“We’ve stayed away from European banks ever since the financial crisis and until they really get to grips with the capital positions and balance sheets,” Lucy MacDonald, chief investment officer global equities at Allianz Global Investors told Bloomberg Television on Wednesday. CoCos “are a useful tool but it’s the liquidity of those instruments which is a question and whether those who bought them thought through that liquidity question.”

Source: Bloomberg

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