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Deutsche Bank: No Liquidity Crisis but Capital Fears Are Right
Deutsche Bank epitomizes most of what ails European banks.
Poor profitability will take an age to fix and that makes it very hard for the German lender to add to its capital base. It needs to reach a higher ratio by 2019.
Equity and bond investors are worried they will lose future payouts if anything knocks its finely balanced plans off course.
Deutsche Bank shares are down almost 40% this year and trade at less than one-third of book value. The stock looks trapped there. The fear is that any recovery could see the lender pull the trigger on another capital raising.
John Cryan, chief executive, says the bank doesn't need to raise equity. But his message actually is that it needs no more equity to back its strategy. The trouble is that any unplanned losses from law suits, fines, restructuring, or defaults would likely mean a capital call, or at least a stop on coupons to some bonds as well as on dividends.
This is why investors in Deutsche Bank's most junior bonds—known as additional tier one capital—have been as worried as equity investors. And why the German lender issued a statement late Monday on its ability to keep paying coupons.
It said it would have more than enough to pay the €350 million ($390 million) on existing bonds this year and next. Deutsche Bank added that in 2017 its available funds should be more than 7.5 times this coupon bill, before accounting for this year's earnings and expected asset sales. That is important as it needs to sell more of these bonds.
To be fair, Deutsche Bank has front-loaded many costs of restructuring, including €1 billion of charges in 2015. It has also planned for almost €8 billion in litigation charges: €5.5 billion held in provisions and another €2.2 billion deemed likely but not yet charged.
This is a lot, but may still fall short. More recent problems, related to money-laundering probes in Russia for example, could add significantly to the bill.
The bank also hasn't taken account of the nationally imposed countercyclical capital add-on that may be implemented over the next couple of years.
Regulators have told Deutsche Bank it must meet a common equity tier one capital ratio of 10.75% this year, which rises to 12.25% at the start of 2019—and that is without any countercyclical add-on. The bank's plans take it to at least 12.5% at the start of 2019.
Mr. Cryan may be right that when Deutsche Bank has spent years giving investors lower returns than rivals, the last thing it needs is more equity. Really, it needs fewer rubbish assets.
But the path to better capital ratios and returns looks treacherous. Any breach of common equity requirements along the way would cut what it is allowed to distribute in dividends, bonuses and coupons on junior bonds.
This is a high-wire act that will continue to strain investors' nerves.
[Source: By Paul J. Davies, The Wall Street Journal, 09Feb16]
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