What capital hole Deutsche Bank has closed the gap on more capital-secure peers by selling non-core assets and refining its risk models, thereby avoiding the need to tap or dilute existing investors. Other banks have done fancy footwork like this. But Deutsche has been characteristically aggressive.
The moves raise the German bank’s core capital ratio to 8 percent under Basel III by year-end, and put Deutsche on course to be within the European banking pack by the end of March, albeit at the rear. All told, the various measures taken in the second half of last year were equivalent to an 8 billion euro cash call.
Yet the capital trick will be harder to repeat. Tweaking models accounted for about a quarter of the 55 billion euro reduction in Deutsche’s risk-weighted assets in the fourth quarter, with active disposals of unwanted holdings reprsenting 60 percent of the reduction. There will be less low-hanging fruit in future. And reviewing risk is almost as one-off a process as the hefty restructuring charges that resulted in Deutsche booking a 2.6 billion euro quarterly loss.
Deutsche hails these moves as an historic reconfiguration. But the renewal process is far from complete, and faces ongoing threats. Basel-based regulators are set to rule on whether standardized risk models should be used across the board. Deutsche would be the worst hit of European banks in that scenario, with likely inflation in risk-weighted assets of 52 percent, according to research by Espirito Santo Investment Bank. Deutsche’s current capital sheen could fade fast.
There’s also the question of whether risk has been meaningfully reduced. Leverage for the quarter was unchanged on Deutsche’s own measures. At least the bank does have plentiful liquidity: half of the 230 billion euros in easy-to-sell assets at the end of last year was cash.
! Nor did Deutsche’s underlying business have a stellar quarter. Investment-banking revenue was weaker than at many Wall Street rivals; and revenue from asset-gathering activities also fell. Real progress on its aim of diversifying the core businesses is yet to be made.
So Deutsche may yet need to turn to the markets. Its chief financial officer, Stefan Krause, is now considering raising contingent convertible bonds to pre-empt U.S. regulators’ demands for a capital injection for its Taunus subsidiary. That’s a welcome climbdown from the bank’s earlier fundamentalist approach to raising capital organically.
Dominic Elliott is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
