July 21, 2020 / 3:18 PM / 17 days ago

Breakingviews - Deutsche Bank’s shock absorbers get vital padding

The logo of Deutsche bank is seen in Hong Kong, China July 8, 2019.

LONDON (Reuters Breakingviews) - Deutsche Bank investors can strike off at least one of the risks facing the 18 billion euro lender: a dicey mid-pandemic cash call. The group’s 13.3% common equity Tier 1 (CET1) capital ratio, unveiled in an impromptu investor update on Tuesday, means Chief Executive Christian Sewing has bigger buffers to withstand a coronavirus-induced surge in bad debt. But there’s little else for shareholders to get excited about. 

The Frankfurt-based lender gave an ad-hoc update because its crucial regulatory measure of capital was almost a percentage point higher than the 12.4% analysts had pencilled in for the second quarter. Sewing’s CET1 ratio was boosted because corporate clients, who massively drew down on revolving credit facilities in the first quarter, have started paying them back. That shrank Deutsche’s risk-weighted assets, the denominator for regulatory capital, and consequently boosted its CET1 ratio.

Just as well. According to an interactive Breakingviews calculator released in April, Deutsche was by far the most likely bank in Europe to dip below its regulatory minimum CET1 ratio – which is now around 10.4%. That’s because the perennially loss-making lender doesn’t have the earnings power to replenish its own capital. If bad debt kept rising, or if there were a second Covid-19 infection wave in Europe, shareholders might have had to stump up. That scenario is less likely now that Sewing has a 2.9% percentage point buffer over the minimum required, especially given ongoing regulatory capital relief.

That means investors have one less reason to sell Deutsche’s shares. What they still lack is a reason to buy. Sewing’s group said on Tuesday that its financial results, besides capital, were only “slightly” better than the average analyst forecast. That’s a disappointment given the blowout trading quarter reported by U.S. peers like JPMorgan, and helps explain why Deutsche’s share price was down 2% after the announcement. Meanwhile, even Deutsche’s hitherto low levels of bad-debt charges will eat into any 2020 trading profits. And continued low interest rates may reduce the chances of it making an annual profit next year. Deutsche’s prospects are a little less precarious, but that’s hardly an enticing prospect for bank investors.

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