Sharp sell-off of Deutsche Bank ADRs on Thursday 29th September

Volatility in Deutsche Bank shares has resumed this evening with a sharp reversal of its U.S.-listed stock. The main trigger appears to be a news report by Bloomberg News that some clients have reduced excess cash and positions in derivatives accounts at the lender. Bloomberg said it had seen an internal bank document to that effect.

Whilst we today reiterated our long-term bearish view on Deutsche Bank stock we do not think any information on counterparty risk has emerged today, and we therefore discount concerns over counterparty risk that have reportedly been voiced in parts of the financial market.

The removed cash and positions by a minority of Deutsche Bank’s 200-plus large derivatives accounts holders are almost certainly immaterial for Deutsche Bank’s shares, except of course due to the effect on sentiment.

The motivation of the account holders which withdrew cash and trades—reportedly hedge funds using the bank’s prime brokerage services—cannot be ascertained by the withdrawals alone.

What we do know is that sentiment on Deutsche’s stock remains jittery after the events of this year and particularly this week, and the reaction of Deutsche’s ADRs—they has fallen as much as 9% from the day’s highs at the time of writing—underscores that negative sentiment.

We expect a harsh winter for Deutsche shares, with a steady continuation of the stock’s long-term decline interspersed with further sharp upsurges of volatility, like today’s. For the time being, we expect the stock to continue to overreact to news which would be regarded as flimsy during ‘normal’ times.

The conclusion of the bank’s negotiations with the U.S. Department of Justice’s to agree a settlement of the DoJ’s mortgage-related investigation will obviously be a key juncture for the shares. However, given that the bank’s programme of buttressing its balance sheet by means of rationalisation and disposal of non-core assets is at an early stage, the end of the DoJ’s mortgage securities litigation expected late this year or early in 2017 is unlikely to stabilise Deutsche’s shares. We note that whilst the eventual sum DB ends up paying to the DoJ is unlikely to be the $14bn the DoJ initially demanded, settlement of Deutsche’s mortgage case, and three other major legal headaches the group faces in the medium term, will require a larger legal provision than the €5.5bn booked at the end of June.