Everything but equity

31 January 2013 By Dominic Elliott

Germany’s biggest bank has boosted capital by refining risk models rather than raising equity. It’s an unusually aggressive approach, and comes alongside a large restructuring. But “New” Deutsche is far from fully formed. Litigation, operational and regulatory risks weigh.

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Deutsche Bank on Jan. 31 announced a 2.6 billion euro loss for the fourth quarter, as a result of litigation costs and one-off restructuring charges. Underlying group pre-tax profit was 775 million euros.
Revenue in Deutsche’s corporate banking and securities division fell 14 percent to 3.43 billion euros quarter-on-quarter, chiefly as a result of lower revenue from fixed income, currencies and commodities trading.
Anshu Jain and Juergen Fitschen, Deutsche’s co-chief executives, said the overhaul of the bank’s operations was part of the “most comprehensive reconfiguration of Deutsche Bank in recent times”.
The bank increased its capital ratio on a fully-loaded Basel III basis to 8 percent by the end of last year, well ahead of a previous 7.2 percent target. In its release, Deutsche said that improvement was “predominantly” due to adjusting the way it models risk as well as tweaks to its non-core activities and balance sheet.
Deutsche reduced risk by 55 billion euros in the fourth quarter, of which 60 percent was as a result of de-risking of non-core activities and 24 percent came from changing the way it models risk.
In the six months to the end of last year, Deutsche reduced Basel III RWAs by 80 billion euros. It had earlier said that it aimed to reduce such RWAs by 90 billion euros in the nine months to the end of March 2013.
Litigation costs for the quarter were 1 billion euros, largely due to Deutsche’s provisions for an upcoming settlement with regulators on Libor and a claim payable to the family of deceased media mogul Leo Kirch.
Chief Financial Officer Stefan Krause told analysts on a call following the release of the results that Deutsche is considering so-called contingent convertible bonds to comply with U.S. capital demands.

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