Some Deutsche Bank AG clients, among them several big and influential hedge funds, have moved to pull billions of dollars from the bank amid concerns about its stability and their exposure, said people close to clients and the bank.
The funds have taken steps to withdraw securities or cash from the bank, dial back their trading activities or both, the people said. They include AQR Capital Management LLC, Capula Investment Management LLP, Citadel LLC, Luxor Capital Group LP, Magnetar Capital LLC and Millennium Management LLC.
Shares in the bank dropped as much as 8% in early trading in Frankfurt on Friday before recovering to trade up 0.8% in the afternoon.
The bank’s U.S.-listed shares rallied nearly 7% in early trade.
The amount of assets recently withdrawn or earmarked for potential withdrawal is in the billions of dollars, one of the people said. That is a small piece of the hundreds of billions in balances analysts say Deutsche Bank has in its so-called prime-brokerage business alone—and a tiny fraction of its more than $600 billion in customer deposits overall.
Still, the retreat by clients is a sign of nervousness about Deutsche Bank’s ability to weather its challenges, some of which are specific to the bank and others wrought by economic conditions plaguing European banks as a group.
The client moves, which have mounted in recent days, don’t mean the hedge funds have stopped doing business with Deutsche Bank, but that they have taken steps to transfer some of their accounts, financing arrangements and trading to other banks as questions about Deutsche Bank’s capital position have intensified, the people said.
Bloomberg News reported earlier Thursday that some Deutsche Bank clients have moved derivatives holdings to other firms this week, citing an internal bank document.
“Our trading clients are amongst the world’s most sophisticated investors,” Deutsche Bank said in a statement. “We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U.S. and the progress we are making with our strategy.”
Beyond hedge funds, executives and salespeople also have tried to ease the concerns of investment-bank and wealth-management clients, people involved in discussions with the bank said.
John Cryan, the lender’s chief executive, was in New York this week, and met with clients amid a swirl of negative news about the bank.
Besides emphasizing Deutsche Bank’s creditworthiness and liquidity, executives and client-relationship managers this week told wealth-management clients, for example, that the bank’s operations aren’t affected by fluctuations in its stock price, the people said.
Several hedge-fund managers said their hands were being forced by their own investors’ drilling them about whether some of their holdings could get caught up at Deutsche Bank should the firm run into deep trouble.
Many said they were reminded of the 2008 financial crisis, when big hedge funds pulled accounts from prime brokers at firms like Bear Stearns, helping precipitate their decline. “That is at the back of everyone’s minds,” said one hedge-fund manager whose firm has dialed back its exposure to Deutsche Bank recently.
Deutsche Bank has repeatedly said those concerns aren’t justified. Banking analysts say that liquidity—the availability of ample, easy-to-sell securities and other funding to satisfy client obligations—isn’t a pressing problem: Deutsche Bank has more than €220 billion (about $246.8 billion) of liquidity reserves.
It also has a formidable backstop in the European Central Bank, which provides huge quantities of liquidity on permissive terms. Through an emergency program orchestrated by the ECB, national central banks in the eurozone can lend yet more—the Bank of Greece provided around €90 billion of emergency liquidity to Greek banks in crisis last year.
But the lack of a convincingly profitable strategy and waning shareholder confidence in the bank are big problems, analysts and investors say. Poor financial results and costly potential fines eat into the bank’s capital cushion, which is already thinner than many of its peers. Fears that the bank might be forced to raise capital, hurting existing shareholders by diluting their stakes, have weighed on shares. The decline in share price, in turn, makes it more difficult to raise fresh capital.
Deutsche Bank’s situation has been complicated by thorny politics at home. German Chancellor Angela Merkel and other government officials have faced relentless questions about their appetite for bailing out Deutsche Bank, should it need a rescue.
Ms. Merkel has for years taken a hard-line stance criticizing taxpayer bailouts of European banks, pressing southern European countries to impose losses on bondholders before taxpayer-financed rescues come into play. Post crisis European rules, many written at Germany’s instigation, make it hard for countries to sail to the rescue of a hometown bank.
Mr. Cryan this week said the bank has neither asked for nor needs a government bailout. A spokesman for Ms. Merkel said there was “no need for such speculation” about state aid for Deutsche Bank, responding to a German magazine report that Ms. Merkel had ruled out providing the bank with government assistance.
Deutsche Bank has been under pressure all year, the epicenter of continent wide worries about European banks’ performance and resilience in the face of a weak economy, low interest rates and flagging business.
The concerns picked up two weeks ago when The Wall Street Journal reported that the U.S. Justice Department floated the idea of Deutsche Bank paying $14 billion to settle a series of high-profile mortgage-securities cases. The bank responded by saying it had no intention to pay “anywhere near” that amount, and said its negotiations with the Justice Department were just starting.
The disclosure sparked fears that Deutsche Bank might have to mount a painful capital hike. Bank executives have repeated to investors, clients and employees—and publicly—that the lender has adequate capital and has no plans to sell shares.
Ex-Deutsche Bank Executives Among 13 Charged in Paschi Probe
Six current and former managers of Deutsche Bank AG -- including ex-asset and wealth management head Michele Faissola -- along with former executives at Nomura Holdings Inc. and Banca Monte dei Paschi di Siena SpA were charged in Milan for colluding to falsify the accounts of Italy’s third-biggest bank and manipulate the market.
A judge in Milan approved a request by prosecutors to try 13 bankers on charges over separate derivative transactions Paschi arranged with the securities firms, said a lawyer involved in the case, who attended the closed-door hearing Saturday, where the decision was announced.
The charges deal another blow to Deutsche Bank, which is seeking to reassure investors and clients that it will be able to withstand pending U.S. penalties over the bank’s sale of mortgage-backed securities and its dealings with some Russian clients. Monte Paschi, the world’s oldest bank, restated its accounts and has been forced to tap investors twice to replenish capital amid a surge in bad loans and losses on derivatives. It’s now attempting to convince investors to buy billions of soured debt before a fresh stock sale.
Deutsche Bank’s shares have slumped 49 percent in Frankfurt this year, swinging wildly last week on news that hedge-fund clients withdrew some funds. Monte Paschi has dropped 84 percent this year amid concern it will struggle to restore profitability and strengthen its finances.
‘No Responsibility’
“We will put forward our defense in court and have no further comment to make today,” Deutsche Bank said in an e-mailed statement.
“I’m convinced that the debate will definitely show that Nomura has no responsibility over Monte Paschi’s false accounting,” said Guido Alleva, a lawyer for Nomura. A spokeswoman for the Japanese bank and a Paschi spokesman declined to comment.
The charges culminate a three-year investigation by prosecutors that showed Monte Paschi used the transactions to hide losses, leading to a misrepresentation of its accounts between 2008 and 2012. The deals came to light in January 2013, when Bloomberg News reported that Monte Paschi used derivatives struck with Deutsche Bank to mask losses from an earlier derivative contract dubbed Santorini.
Faissola, whose roles included overseeing rates and commodities, was put in charge of Deutsche Bank’s combined asset and wealth management division in 2012 when Anshu Jain and Juergen Fitschen took over as co-chief executive officers of the Frankfurt-based lender. Deutsche Bank last October said Faissola would leave after a transition period, and John Cryan has replaced Jain and Fitschen as CEO.
Former Deutsche Bank managers Michele Foresti, who oversaw rates and European credit flow trading, and Ivor Dunbar, former co-head of global capital markets, also were also indicted.
Monte Paschi’s former executives Giuseppe Mussari, Antonio Vigni and Gianluca Baldassarri and Nomura’s former bankers Sadeq Sayeed and Raffaele Ricci also will face trial for allegedly obstructing regulators after the investigation revealed that the 2009 deal, dubbed Alexandria, was designed to disguise losses from a previous investment.
Monte Paschi asked for a plea-bargain agreement in July. The lender said at that time that the request was agreed to with prosecutors in the Milan investigation, and if accepted by the judge the bank will need to forfeit 10 million euros ($11.2 million) and pay a fine of 600,000 euros. A decision is expected on Oct. 14.
Deutsche Bank’s Dario Schiraldi, Matteo Vaghi and Marco Veroni as well as Monte Paschi’s Daniele Pirondini and Marco Di Santo will go to trial, which is scheduled to begin on Dec. 15.
