Deutsche Bank Revamp Leaves Firm Behind Peers on Capital

Photographer: Hannelore Foerster/Bloomberg

Juergen Fitschen, co-chief executive officer of Deutsche Bank AG, left, speaks as Anshu Jain, co-chief executive officer of Deutsche Bank AG, listens during a news conference to present the company's future strategy in Frankfurt, Germany, on Tuesday, Sept. 11, 2012. Close

Juergen Fitschen, co-chief executive officer of Deutsche Bank AG, left, speaks as Anshu... Read More

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Photographer: Hannelore Foerster/Bloomberg

Juergen Fitschen, co-chief executive officer of Deutsche Bank AG, left, speaks as Anshu Jain, co-chief executive officer of Deutsche Bank AG, listens during a news conference to present the company's future strategy in Frankfurt, Germany, on Tuesday, Sept. 11, 2012.

Deutsche Bank AG (DBK)’s overhaul under its new co-chief executive officers looks set to leave Europe’s largest bank with thinner capital buffers than peers.

Deutsche Bank plans to boost core tier 1 capital to at least 8 percent of assets weighted by risk under Basel III rules by the end of March 2013, and to more than 10 percent two years later, co-CEOs Anshu Jain and Juergen Fitschen said in Frankfurt yesterday. Its biggest competitors will reach similar levels months or years sooner, based on forecasts from the banks.

Deutsche Bank is winding down assets deemed among its riskiest under rules devised to prevent a repeat of the bank rescues that followed the 2008 collapse of Lehman Brothers Holdings Inc. Jain said yesterday that while capital concerns have had an effect on the stock, tapping shareholders would be “irresponsible” without pursuing other options first.

“The capital issue has not been addressed adequately,” said Dirk Sebrechts, a Brussel-based fund manager at KBC Asset Management SA. “This is why I would not buy the shares.”

Deutsche Bank fell 0.7 percent to 32.93 euros by 10:12 a.m. in Frankfurt trading, compared with a 0.3 percent gain in the 38-company Bloomberg Europe Banks and Financial Services Index. The stock gained 4.1 percent yesterday.

Credit Suisse

Tougher rules from the Basel Committee on Banking Supervision, known as Basel III, are forcing lenders to hold more reserves starting in 2013. Banks worldwide will have to hold common equity of at least 7 percent of risk-weighted assets by 2019, and firms deemed systemically important, such as Deutsche Bank, will need more.

Deutsche Bank had the fifth-lowest core tier 1 capital ratio of the 24 biggest European banks by assets under the current rules on June 30, data compiled by Bloomberg show. The goals the bank gave yesterday are for fully applied Basel III standards.

“This is one area that the market will still regard Deutsche Bank as lagging its peers,” Simon Adamson, a London- based analyst at CreditSights, wrote in a note. “It is likely to remain towards the bottom of the peer group.”

In Europe, UBS AG (UBSN) and Credit Suisse Group AG of Zurich, London-based Barclays Plc and BNP Paribas SA (BNP) of Paris have all set out forecasts for higher Basel III common equity levels than Deutsche Bank in recent public statements, as has Goldman Sachs Group Inc. of the U.S.

Return Target

Credit Suisse, Switzerland’s second-biggest bank, announced plans in July to boost capital by 15.3 billion francs ($16.3 billion) this year after the Swiss National Bank urged a “marked increase.” The bank, led by CEO Brady Dougan, aims to boost its Basel III ratio to 8.6 percent by year-end.

Jain, in an interview with Bloomberg Television yesterday, acknowledged Deutsche Bank has lagged behind on capital. He said boosting reserves as planned by next March will put the company “back in the pack,” and the further increase set for 2015 “is the one that will put us where we need to be.”

JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan said in a note Deutsche Bank should have been “more aggressive” on capital and raised 3 to 5 billion euros.

The 2015 target “compares poorly to its peers, who we estimate would reach a Basel III common equity ratio of 10 percent on average by 2013,” said the analysts, who have a “neutral” rating on the stock. “We remain concerned about capital at risk.”

More Leverage

Jain, 49, and Fitschen, 64, are following their predecessor Josef Ackermann, 64, in making returns, rather than capital, their main priority. The bank’s new target of a 12 percent after-tax return on equity under Basel III rules is comparable to Ackermann’s goal of a 25 percent pretax ROE under Basel II standards, Chief Financial Officer Stefan Krause said yesterday.

Jain told analysts in Frankfurt yesterday that higher capital ratios at rivals will make it more difficult for those firms to reach their profitability targets.

“All I see is very highly-capitalized competitors vastly disappointing and promising to the future,” Jain said. “I think in the end gravity will play a role.”

Deutsche Bank is also maintaining higher leverage than peers. The bank’s equity made up 2.5 percent of all assets at the end of the second quarter, the lowest level among the 24 biggest European banks, according to data compiled by Bloomberg.

Jain said the bank has better access to funding than most of its peers, doesn’t “take leverage lightly” and will further cut borrowing in the future.

Same Debate

Jernej Omahen, an analyst with Goldman Sachs, questioned Jain on whether Deutsche Bank can keep its high leverage in the current regulatory and market environment.

“We had the same debate with Credit Suisse (CSGN) and Brady Dougan for the past three years,” Omahen said at the conference yesterday. “They were funding even cheaper than Deutsche, and the Swiss National Bank -- who’s not even their regulator -- stepped in and said, ‘you know what, we don’t want to have the most levered large banks in the world in Switzerland.’”

“Less leverage is better than high leverage,” Jain replied. “Please don’t think we’re sanguine, or relaxed or ignoring leverage completely. Our leverage has come down dramatically in the last four years and it will continue to.”

Fixed Income

Deutsche Bank will expand its global transaction banking and asset and wealth management units to help it achieve ROE targets as capital requirements for the investment bank increase, Jain said. The fixed-income business, which has traditionally been the biggest revenue contributor for the bank, will be a “drag” on ROE under Basel III rules, Jain said.

Expanding transaction banking and money-management units will be “hugely accretive to our ROE,” Jain said. “And the only way we can get to our ROE is if those two divisions deliver what they need to.”

Deutsche Bank’s plans to boost profitability by cutting 4.5 billion euros ($5.8 billion) of costs and to increase capital without resorting to a share sale were praised by some investors.

“They are trying all they can to avoid diluting the shares,” said Peter Braendle, who helps manage about 53 billion francs at Swisscanto Asset Management in Zurich. “This is very positive.”

Deutsche Bank plans to increase capital ratios by cutting Basel III risk-weighted assets by 135 billion euros, including about 100 billion euros from the investment bank.

Rapid De-Risking

The de-risking process will be “very rapid,” Jain told reporters at a press conference. The bank plans to achieve 45 billion euros in reductions by the end of the first quarter and has already cut 14 billion euros in the first two months of the current quarter, incurring some trading losses, he said.

Deutsche Bank said it can also reduce bonuses or defer compensation to help meet capital goals. The German bank has the option of reducing its dividend and selling shares, slides the company posted on its website show.

“In the current regulatory environment, investors would prefer the bank to move faster on the capital issue,” said Jon Peace, a London-based analyst at Nomura Holdings Inc. (8604) who has a “reduce” recommendation on Deutsche Bank shares.

UBS, which had the highest core Tier 1 capital ratio at the end of June of the 24 biggest European banks, said in July it expects its Basel III capital ratio to be “comfortably above” 9 percent by the end of 2012.

BNP Paribas SA, France’s largest bank, had a capital ratio of 8.9 percent at the end of June under fully applied Basel III rules, nearly reaching its 9 percent target six months ahead of schedule, according to CEO Jean-Laurent Bonnafe. Barclays Plc (BARC), the U.K.’s second-biggest bank, expects to have a core Tier 1 ratio of 9.7 percent under the full Basel III rules at the end of next year, using a consensus of analyst estimates for earnings in 2013, Finance Director Chris Lucas said July 27.

Goldman Sachs, based in New York, estimates that its common equity ratio under fully-applied Basel III standards will be almost 10 percent by the end of 2013.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Annette Weisbach in Frankfurt at aweisbach1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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