Deutsche Bank Risk Gauges Hint Investors Endorse Turnaround Plan

(Bloomberg) -- A recovery plan at Deutsche Bank AG may be starting to win the approval of investors.

The cost of credit protection on the bank’s debt has fallen to the lowest in months, according to ICE Data Services. Deutsche Bank’s riskiest bonds, that stand first in line for losses if Germany’s biggest lender runs into trouble, have risen to the highest since May, according to data compiled by Bloomberg.

The moves suggest reports of plans by Chief Executive Officer Christian Sewing, including cuts to the U.S. business, management changes and the potential creation of a bad bank that could house up to $56 billion of unwanted assets, are welcomed by investors, according to Jerome Legras, a managing partner at Axiom Alternative Investments in Paris.

“The credit market is happy to see a loss-making unit be wound down and leverage being reduced,” he said. “The smaller Deutsche Bank gets, the stronger it is.”

Deutsche Bank has gone from a top global investment bank to sick man of European finance as it struggled to adapt to the stricter regulation and more challenging markets seen since the global financial crisis. Sewing’s recovery strategy follows a decision to walk away from merger talks with smaller rival Commerzbank AG earlier this year.

“Deutsche Bank is working on measures to accelerate its transformation so as to improve its sustainable profitability,” a Deutsche Bank spokesman said on Friday, without commenting on the latest market moves.

Credit swaps insuring Deutsche Bank’s riskiest debt have fallen 68 basis points this week to the lowest since May 7, according to ICE Data Services. That’s outperformed a market average of 24 basis points on an index of junior swaps on European banks and insurers.

Contracts referencing the bank’s next-riskiest class of bonds are holding near the lowest since April, according to the ICE data.

New swaps that started trading last month and insure Deutsche Bank’s safest senior bonds have fallen to a record, about 30 basis points below their initial trading level in May. A decline in the price of these swaps can lower Deutsche Bank’s trading costs as counterparties use them as a reference for hedging.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott

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