Deutsche Bank shares slump on report of cautious hedge funds

Shares in Deutsche Bank fell again at the start of trading, following a report that 10 hedge funds had reduced their exposure to the lender.

The funds, a small sub-set of the over 800 who do busines with Deutsche Bank, had moved their listed derivative holdings to rivals, according to an internal document seen by Bloomberg.

Nonetheless, the "vast majority" of Deutsche´s more than 200 derivatives clearing clients had made no changes, the report said.

"Despite a high implied Cost of equity of 20%, DB risk-reward looks unattractive as dilution risk is high at current 0.3 times price-to-tangible book value, leading to only €14.8bn market cap with every €1bn additional capital equal to just 26 basis points core equity tier 1 improvement. We prefer US investment banks Goldman Sachs and Morgan Stanley as the only 'overweight' amongst global investment banks, returning almost 100% of annual profits to shareholders, "JP Morgan analysts Kian Abouhossein and Amit Ranjan said in a research report sent to clients on 30 September.

"An inability to generate organic capital is the root of DB’s problems in our view.

"[...] We conservatively assume $5.4bn is used to settle litigation issues other than RMBS, such as Russia and hence a settlement on RMBS above $4bn would imply DB’s current reserves would not be enough and it would have to replenish its reserves, thus putting capital at risk. We believe a settlement may need to be reached relatively quickly to avoid business impact."

As of 0928 BST shares in Deutsche Bank were down by 7.59% to €10.05, having hit an intraday low of €9.99.