By Douglas Busvine and Edward Taylor
FRANKFURT (Reuters) - Deutsche Bank and its biggest investor sought to reassure shareholders and staff of its financial strength after a ratings downgrade on Friday questioned its ability to implement a plan to return to profitability.
Shares in Deutsche Bank closed at an all-time low on Thursday as past misadventures in high-risk investment banking haunted new Chief Executive Christian Sewing's attempt to refocus on its more staid corporate banking roots.
A source familiar with the thinking of the European Central Bank, which regulates Deutsche Bank, and its top shareholder HNA Group Co Ltd of China, said they backed management's strategy of retrenchment.
This followed a report on Thursday in the Wall Street Journal that the U.S. regulator viewed the lender as "troubled" last year, and on Friday a Standard & Poor's downgrade of Deutsche Bank's credit rating to BBB+ from A-.
Meanwhile in Australia, federal prosecutors were preparing criminal cartel charges against Deutsche, as well as the country's third-largest bank and Citigroup, over a $2.3 billion share issue. All deny wrongdoing.
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Sewing, a Deutsche Bank 'lifer' appointed in April after the removal of former CEO John Cryan, said in a letter to staff: "At group level, our financial strength is beyond doubt".
But the newsflow was "not good", Sewing added as S&P questioned his ability to get Deutsche Bank back to profit after three years of losses by scaling back its global investment bank and refocusing on Europe and Germany.
"We see significant execution risks in the delivery of the updated strategy amid a continued unhelpful market backdrop, and we think that, relative to peers, Deutsche Bank will remain a negative outlier for some time," S&P said
TROUBLED CONDITION
Credit ratings are especially crucial for banks, whose perceived health is important in winning business and Deutsche Bank is a big issuer of debt securities whose cost is highly reliant on them.
S&P had rated Deutsche Bank's long-term credit at A-, on negative credit watch. That was one or two notches below most European competitors, with Switzerland's UBS rated A+ with a stable outlook.
Sewing also addressed U.S. regulatory concerns following the report that said the Federal Reserve had designated Deutsche Bank's operations as in a "troubled condition".
The WSJ report sent Deutsche Bank's shares down 7 percent on Thursday to their lowest-ever closing level, valuing it at $22 billion. They recovered by 4 percent on Friday.
Although Deutsche Bank's senior debt has held up well of late, its junior and hybrid debt instruments that would be vulnerable to losses if the bank got into serious financial trouble have underperformed.
Deutsche Bank's 1.75 billion euro contingent convertible (CoCo) bond with a 6 percent coupon saw its cash price hit a 15-month low of 89.735 cent on the euro on Thursday, translating to a yield of 9.24 percent.
It has since recovered to a cash price of 93.167 and a yield of 8.1 percent; still nearly double this year's low in January.
FULLY FUNDED
Sewing said Deutsche Bank's credit and market risk levels had rarely been so low, speculation it was exposed to political uncertainty in Italy was unfounded, and funding plans for this year were well advanced.
Deutsche Bank was also well positioned to react to excessive moves in debt markets, Sewing said, adding that a series of enforcement actions by the U.S. Federal Reserve were principally related to weaknesses in internal controls and infrastructure.
"We have made progress in remediating them over the past year," he wrote. "We're not yet where we want to be, but we are steadily getting there."
In a rare intervention following the U.S. reports, European banking regulators said Deutsche had made "good progress" in its efforts to address regulatory concerns.
"The bank now has a tighter management team, good capital and liquidity, and supervisors are reassured by the plans they see," a source familiar with the ECB's thinking said.
Chinese investor HNA Group Co Ltd, which controls an 8 percent stake in Deutsche Bank, said it supported the bank's management and its strategy.
"HNA remains committed to Deutsche Bank's long-term success and looks forward to continuing to work with the management team in support of that goal," a spokesman for HNA said.
A German government spokesman declined to comment on Deutsche Bank on Friday.
(Additional reporting by Andreas Framke and Abhinav Ramnarayan; Editing by Alexander Smith)