Deutsche Bank is running just to stand still. Germany’s biggest lender increased its equity base by 1.3 billion euros in the first quarter, chiefly by retaining earnings. That self-help is impressive in difficult markets. But it probably will not avert the need for Deutsche to boost capital by tapping shareholders.
For starters, organic progress on capital was offset by other hits. A rise in risk-weighted assets (RWAs) knocked Deutsche’s common equity Tier 1 ratio (the industry measure of capital strength) down 20 basis points to 9.5 percent. The bank’s relatively late adoption of Basel III capital modelling accounted for just under half the 6.5 percent rise in RWAs. The rest of the uplift was the result of Deutsche expanding its trading book as it sought to take market share in what is usually the busiest period of the year.
That competitive aggression did have some effect. Debt trading revenue was down 16 percent year-on-year, although this includes the now non-core commodities business. That sharp decline is still towards the more respectable end of the range seen on Wall Street. Meanwhile, Deutsche’s retail and commercial arm and transactional banking business are on the mend.
But Co-Chief Executives Anshu Jain and Juergen Fitschen still have cause to fret. Costs have been higher than expected when the pair launched their strategy in September 2012. Investigations for Libor, foreign exchange and other markets have required additional personnel. Europe’s banking sector asset quality review and stress tests are also sapping resources. Deutsche’s cost-to-income ratio rose over the quarter to 77 percent – way off the bank’s long-term target of 65 percent.
What’s more, a new European Central Bank requirement to measure assets more conservatively will knock between 1.5 billion euros and 2 billion euros off Deutsche’s capital base, it estimates. At the higher end of that range, Deutsche will still need as much as 5 billion euros by this time next year to hit its capital target.
If Deutsche can sustain its level of organic capital generation and keep litigation charges down, concerns about its capital would diminish. Those are big ifs. At least the operational progress will make an equity increase much easier to sell to shareholders.
Source: Reuters
For starters, organic progress on capital was offset by other hits. A rise in risk-weighted assets (RWAs) knocked Deutsche’s common equity Tier 1 ratio (the industry measure of capital strength) down 20 basis points to 9.5 percent. The bank’s relatively late adoption of Basel III capital modelling accounted for just under half the 6.5 percent rise in RWAs. The rest of the uplift was the result of Deutsche expanding its trading book as it sought to take market share in what is usually the busiest period of the year.
That competitive aggression did have some effect. Debt trading revenue was down 16 percent year-on-year, although this includes the now non-core commodities business. That sharp decline is still towards the more respectable end of the range seen on Wall Street. Meanwhile, Deutsche’s retail and commercial arm and transactional banking business are on the mend.
But Co-Chief Executives Anshu Jain and Juergen Fitschen still have cause to fret. Costs have been higher than expected when the pair launched their strategy in September 2012. Investigations for Libor, foreign exchange and other markets have required additional personnel. Europe’s banking sector asset quality review and stress tests are also sapping resources. Deutsche’s cost-to-income ratio rose over the quarter to 77 percent – way off the bank’s long-term target of 65 percent.
What’s more, a new European Central Bank requirement to measure assets more conservatively will knock between 1.5 billion euros and 2 billion euros off Deutsche’s capital base, it estimates. At the higher end of that range, Deutsche will still need as much as 5 billion euros by this time next year to hit its capital target.
If Deutsche can sustain its level of organic capital generation and keep litigation charges down, concerns about its capital would diminish. Those are big ifs. At least the operational progress will make an equity increase much easier to sell to shareholders.
