January 30, 2013 7:34 pm

Deutsche Bank chiefs maintain course

Seven months after taking over from Josef Ackermann at the helm of Deutsche Bank, Anshu Jain and Jürgen Fitschen have been striving to show the differences they intend to make at Germany’s flagship lender.

But in one respect – and to the dismay of analysts and some investors – Deutsche’s leaders are steering the same course as their predecessor: they are firmly rejecting the need for the bank to raise more capital.

At Thursday’s results presentation, Mr Jain and Mr Fitschen are expected to present a fourth-quarter loss that some analysts say could exceed €1bn after Deutsche warned last month that it would be hit by one-off charges.

But even such substantial clean-up charges may get less attention from the market than their capital situation. That is because the lender has one of the lowest core tier one capital ratios – a regulatory measure for a bank’s financial strength – among European peers.

At an expected 7.2 per cent at the end of last year, measured using incoming Basel III rules, the bank features among the five worst capitalised banks in a Morgan Stanley list of 35 of Europe’s largest lenders.

Almost every analyst’s report on the bank refers prominently to the lender’s perceived capital shortfall – which James Chappell at Berenberg Bank estimates to be at about €20bn.

“We think investors will continue asking whether the bank’s capital cushion is too thin to avoid a capital increase, should conditions deteriorate,” analysts at Credit Suisse recently wrote in a note.

In 2010 Deutsche did tap investors for €10bn to complete a takeover of Postbank. Otherwise, Mr Ackermann insisted Deutsche would manage its balance sheet and build up reserves without making an undue call on investors.

Mr Jain is similarly against a rights issue that would dilute shareholders. At an investor presentation in September he called an organic improvement in the bank’s capital position – to a core tier one ratio of more than 10 per cent by 2015 – one of three key priorities, alongside lower costs and a post-tax return on equity of at least 12 per cent. With colleagues he has gone further, saying recently that strengthening capital without a rights issue is his most important goal.

Some investment bankers are surprised that, faced with an onerous list of regulatory requirements and litigation risks, Mr Jain and Mr Fitschen have not used their honeymoon period to make a capital call. Their surprise has increased in line with Deutsche’s share price, which is up more than 60 per cent since July. “There is a window of opportunity they could use, and there are still a lot of issues that have not been cleared up,” says one Frankfurt banker.

Analysts see risks to the capital goals, not least that the bank will post lower profits that slow down its accumulation of capital. A further market downturn in the investment banking and trading operations, and structural changes such as the movements of swaps trading to exchanges, might hit profits.

One of the top litigation risks is a potential settlement over the alleged manipulation of Libor, for which Deutsche has already taken a provision.

Regulation is also bearing down. Deutsche is grappling with possible US rule changes that could force it to transfer billions in capital to its US subsidiary.

There is also a growing regulatory debate over changes of internal risk models to reduce risk weighted assets and by doing that building up capital. Christopher Wheeler, an analyst at Mediobanca, says Deutsche is a heavy user of “risk model refinement, something BaFin [the German banking regulator] may find problematic”.

Some rival bankers compare Mr Jain to Brady Dougan, Credit Suisse’s chief executive who was forced to react last summer when the Swiss National Bank called for the bank to raise capital faster.

In a sharp contrast to the hawkish Swiss regulators, though, BaFin is less likely to ask its banks to boost capital. Deutsche could still muddle through with a capital level that will trail rivals for years.

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