Deutsche Bank CEO John Cryan rushed to shore up confidence inhis beleaguered lender after concern some clients are reducingexposure to the company pushed the shares to record lows.

The bank's balance sheet is safer than at any point in the pasttwo decades, Cryan told staff in a memo Friday. “Trust is thefoundation of banking. Some forces in the markets are currentlytrying to damage this trust,” he said.

Analysts also came to the bank's defense. Stuart Graham atAutonomous Research wrote that Deutsche Bank has enough readilyavailable funds on hand to weather more than two months of severestress, including trading clients pulling back. Goldman Sachs GroupInc. analysts led by Jernej Omahen said the lender can also accessbackstops from the European Central Bank.

“Deutsche has many problems, but liquidity is not one of them,”Graham said in a note. “There can be no doubt that Deutsche couldaccess significant additional liquidity from the ECB, should itever need it.”

Deutsche Bank shares pared some of their losses of as much as 9%following Cryan's memo, trading down 2.7% at 10.59 euros by 2:34p.m. Friday in Frankfurt. The stock and riskiest bonds had beenpushed lower in earlier trading after Bloomberg News reported lateThursday that some hedge funds moved to reduce their financialexposure to the bank.

The funds, a small subset of the more than 800 clients in thebank's hedge fund business, have shifted part of their listedderivatives holdings to other firms this week, according to aninternal bank document seen by Bloomberg News. Among them are IzzyEnglander's $34 billion Millennium Partners, Chris Rokos's $4billion Rokos Capital Management, and the $14 billion CapulaInvestment Management, said a person with knowledge of thesituation who declined to be identified talking about confidentialclient matters.

“The issue here is now one of confidence,” said Chris Wheeler, afinancial analyst with Atlantic Equities in London. “That's what'sgoing on here. The thinking is 'Deutsche Bank is fine, but there'sa slim chance it might not be, so why leave my money inthere?'”

How Deutsche Bank Key Metrics Stack Up as Risk PremiumsRise

Millennium, Capula and Rokos declined to comment when contactedby phone or email. The hedge funds use Deutsche Bank to clear theirlisted derivatives transactions because they are not members ofclearinghouses.

While the vast majority of Deutsche Bank's more than 200derivatives-clearing clients have made no changes, the hedge funds'move highlights concern among some counterparties about doingbusiness with Europe's largest investment bank. Deutsche Bank'sstock and debt were pushed lower after the U.S. Justice Departmentearlier this month requested $14 billion to settle a probe intoresidential mortgage-backed securities, sparking concerns about thelender's financial health.

In his memo to staff, Cryan said he is taking DOJ settlementswith other banks “as a benchmark,” echoing previous remarks that heexpects U.S. authorities to scale back their request. Deutsche Bankhas more than 215 billion euros in liquidity reserves, he said,when calling it an “extremely comfortable buffer.”

Commerzbank Chief Financial Officer Stephan Engels toldBloomberg Television on Friday that he's “relaxed” about DeutscheBank's counterparty risk.

“We're balancing on a bit on a knife, and if the customers stayloyal and they can somehow work their way through this, they makeit through without some kind of help,” Steve Rattner, chairman atWillett Advisors, said in an interview with Bloomberg TV. “Butthere's a possibility that they'll need liquidity assistance.”

The financial pressure on Deutsche Bank has already spilled intoGerman politics, stirring speculation Chancellor Angela Merkel'sgovernment might be forced to offer support. Cryan told Bildnewspaper this week that the firm doesn't plan to raise capital andthat government aid was “out of the question.” Any taxpayer-fundedsolution for the bank's troubles would be Merkel's downfall, saidthe leader of Germany's biggest opposition party.

Risk Contributor

The International Monetary Fund in June said Deutsche Bank maybe the biggest contributor to risk among so-called globalsystemically important banks. The bank has gross notionalderivatives exposure of 46 trillion euros, according to an InvestorRelations presentation published this month. After netting andcollateral, reported derivative trading assets fall to 41 billioneuros, the bank said.

“Deutsche Bank may be a victim of speculative attacks,” saidCarsten Klude, chief economist at M.M. Warburg & Co. inHamburg. “The potential cost to settle the U.S. mortgageinvestigation of course triggers horror scenarios. But fears of apotential collapse are far-fetched.”

Clients review their exposure to counterparties to avoidsituations like the 2008 collapse of Lehman Brothers Holdings Inc.and MF Global's 2011 bankruptcy when hedge funds had billions ofdollars of assets frozen until the resolution of lengthy legalproceedings.

Deutsche Bank, which is scheduled to publish its third-quarterearnings next month, has long struggled to adapt to an era oftougher capital requirements and diminished trading revenue. Cryanhas already said that the lender may fail to be profitable thisyear, calling it a peak restructuring year, as he eliminatesthousands of jobs and cuts risky assets.

“The systemic problem we have is that confidence and trust arenot back to the normal levels,” Lothar Mentel, CEO of TattonInvestment Management, said in an interview with Bloomberg TV.“We're getting to a point where perhaps there's value in thestock.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.