is restructuringwith a vengeance yet markets are testing its mettle and its capital continuesto cause concern among some analysts.
"Our first full quarter in a multiyearrestructuring" was how CFOMarcus Schenck summarized the start of 2016 during a quarterly resultsconference call.
Whilehe observed that the quarter had proved extraordinarily challenging with"a substantial decline in global markets," the results wererespectable, with for example the decline in litigation costs more thanoffsetting the fall in global markets' net income. Christian Hamann, ananalyst at Hamburger Sparkasse, said following the call that this effect hadgiven the P&L a relatively "pleasing” look," while remarking:"The question now is whether the provisions will suffice."
Capitalwas a key talking point during the call. Deutsche Bank's risk-weighted assetsrose and Tier 1 capital fell, resulting in a decline in its common equity Tier1 and leverage ratios quarter over quarter.
Co-CEOJohn Cryan pointed out that the impending completion of the would lift the CET1 bysome 50 basis points from the reported 10.7% while significant balance sheetcash had depressed the leverage ratio to 3.4%. This ratio, he thought, appearedless important to regulators than the CET1 ratio.
Cryansaid that "everything that is coming out of Basel" on risk-weightingappears to involve an RWA increase but he was taking comfort from centralbankers' statements that these regulatory changes would not impact banks' CET1ratios negatively.
Analystsexpressed concern not just about regulatory inflation of RWAs but also aboutthe apparent conflict between Deutsche Bank's need to grow while shrinking itsbalance sheet exposures.
Cryanemphasized that Deutsche Bank was committed to growth yet had ambitiousrestructuring plans in 2016, seeking to run off and effectively wind down thenoncore bank as well as resolving the outstanding litigation issues. Theintended sale or IPO of DeutschePostbank AG will occur after margins and costs have been improved,which might take time.
Cryanadmitted that Deutsche Bank could report a loss in 2016 as it sold assets.
Oneanalyst expressed concern that Deutsche Bank appeared to have a significantequity shortfall compared to its target under the Supervisory Review andEvaluation Process of 12.25%. Cryan pointed out that the SREP target was forthe end of the decade and that the bank was meeting its phased-in targets. Headded that generally regulators appeared to willing to countenance flexibilityon timing.
Hefurther said that legal changes to be implemented next year would see thebank's regulatory capital rise to perhaps 27% of RWAs under German totalloss-absorbing capacity rules, leaving key counterparties confident in thebank. Capital concerns, in other words, are not impeding business operations.
Moreover,Cryan insisted, while the Postbank sale, the noncore runoff and the Hua Xiadisposal would lift the CET1 ratio, a further boost will come from cuts to RWAsin the global markets and private clients businesses.
NeilSmith, a bank analyst at Bankhaus Lampe, said in an interview that thefirst-quarter performance, though marred by troubled markets, gave himconfidence that Deutsche Bank was en route to meeting its strategic targets,which included achieving its regulatory capital goals. "They have enoughcapital," he said. "The reason that I am comfortable is that the 2020targets explained how they are going to do it. At least, they are on track tomeet the 2018 and 2019 targets. In the first quarter, they were ahead ofconsensus."
Smiththought the deleveraging was being accelerated this year, in a likely tradeoffleading to losses this year. "They are bringing future losses into 2016but making more rapid progress," he said.
However,Hamann thought the danger of a capital raise had increased after thefirst-quarter results. "I think they will do everything in their power toavoid a raise," he said. "I would put the possibility during the nextyear of just under 50%."
Citianalysts wrote in a note that the leverage ratio was the critical capitalissue. Admitting that Schenck had indicated that the 4.5% leverage target byend-2018 is self-imposed, the analysts insisted that the reported 3.4% figureis far weaker than that of competitors who already boast a ratio around 4.5% to5.0%. By contrast, Deutsche Bank's ratio might rise to 4.0% at end-2018. Thissuggests a capital shortfall of between €7 billion and €9 billion."Deutsche needs to raise capital, in our view,"