Zurich: Deutsche Bank AG shares dropped to a record low amid concerns that mounting legal bills, including a looming fine over its pre-crisis mortgage bond business, may force the German lender to raise capital.

The shares declined as much as 6.9 per cent and traded at 10.71 euros at 12:38 pm in Frankfurt, down 6.1 per cent. That brings losses to about 53 per cent this year. The 38-member Bloomberg Europe Banks and Financial Services Index slipped 2.4 per cent, with Deutsche Bank the worst performer.

Chief Executive Officer John Cryan’s efforts to shore up capital and profitability, by cutting thousands of jobs and reducing risky assets, have been put at risk by the US Justice Department claiming $14 billion (Dh51.4 billion) to settle a probe tied to residential mortgage-backed securities. The claim sparked concerns among investors that the lender will be forced to raise capital to weather mounting legal costs, with Germany’s Focus magazine reporting that the government had ruled out any backing for the company.

“Clearly headlines around the DOJ settlement and the $14 billion continue to weigh on the stock,” Daniel Regli, an analyst at MainFirst. “Nobody believes that they will end up paying that amount, but for some investors it might be a concern that even the German government is discussing Deutsche Bank’s situation.”

The lender’s 1.75 billion euros ($2 billion) of 6 per cent additional Tier 1 bonds, the first notes to take losses in a crisis, fell about 2 cents on the euro to 73 cents, near a seven-month low, according to data compiled by Bloomberg.

Chancellor Angela Merkel has ruled out state aid for Deutsche Bank ahead of national elections in September 2017, Focus magazine reported, citing unidentified government officials. The German leader also declined to step into the bank’s legal imbroglio with the Justice Department, the magazine reported.

Steffen Seibert, a spokesman for Merkel, told reporters in Berlin on Monday that there are “no grounds” for speculation over state funding for Deutsche Bank, adding that the government expects a “fair result” in the lender’s talks with the DOJ.

The case concerns allegations that the bank misled investors about the quality of subprime mortgage bonds it created and sold during the US housing boom that led to the 2008 crisis. Deutsche Bank also faces inquiries into legal issues including precious metals trading and billions of dollars in transfers out of Russia, complicating Cryan’s restructuring efforts.

Capital concerns

A settlement range of $3 billion to $3.5 billion for residential mortgage-backed securities would leave the bank room to settle other legal issues, while any additional $1 billion in litigation charges would erode 24 basis points in capital, JPMorgan Chase & Co. analysts wrote. Any settlement above 5.4 billion euros (Dh22.3 billion) would imply a capital increase is needed just to pay the fine, according to Andrew Lim, an analyst at Societe Generale SA.

That’s roughly the amount the bank had set aside for all legal disputes at the end of the first half. While Deutsche Bank has raised 31.7 billion euros through three capital increases since the global financial crisis erupted, consumer banking chief Christian Sewing last month ruled out tapping investors in the near future, according to an interview with Bild-Zeitung.