Deutsche Bank's Issues Are in its Future as Much as its Past -- Heard on the Street
September 27 2016 - 9:40AM
Dow Jones News
By Paul J. Davies
Deutsche Bank's biggest problem isn't just that it needs
capital, but that it will find it very hard to raise any.
The German lender's stock keeps hitting multi-decade lows, which
means an equity issue would be very costly. But that isn't all.
Whatever the valuation, Deutsche will struggle to convince
investors that it can make a return that beats its cost of capital
in the years ahead.
The bank faces all the problems that plague its peers, but it
has most of them worse than rivals. Its costs are among the
highest, its balance sheet among the most bloated and its
longer-term profitability one of the least attractive.
It has been apparent for some time that Deutsche would need
extra capital to meet expected requirements in 2019 when all
post-crisis rules come fully into force. And that is before taking
into account further balance-sheet inflation coming from regulators
and the costs of fines and penalties.
Deutsche's pending costs to settle U.S. mortgage bond probes are
potentially more damaging to its capital than for rivals. But what
is more, any settlements will create a 10-year earnings drag by
adding even more unproductive operational risk assets to a balance
sheet that already generates weaker profits than peers.
Deutsche is still Europe's leading investment bank by revenue,
but it is losing ground globally to U.S. rivals and some European
peers are catching up.
Plus, it produces fewer revenues for the size of its balance
sheet than peers. Its sales and trading revenue per unit of
risk-weighted assets in the first half were less than
three-quarters of what Société Générale made and barely more than
half of what Credit Suisse made.
Deutsche's operational risk-weighted assets, which add to
capital charges without generating any revenue, are already about
25% of its group balance sheet. But in its main markets business
that could rise as high as 40%. That is a hefty burden of
unproductive assets.
The bank also has higher leverage than many peers. This can be
seen in the low level of riskiness it assigns to its assets, which
makes it vulnerable to changes due from global rule makers as they
try to squeeze out the excess variability in banks' internal risk
models.
There are no quick fixes to any of this. A sale of its asset
management business might bring in some money but would weaken
long-term returns. A merger with Commerzbank could create
efficiencies at a cost, but would still leave it competing with the
local savings and regional banks that don't need to make profit for
shareholders.
But perhaps the biggest problem is that Deutsche never really
made fantastic profit. There is only one year in the past 15 when
its net income was high enough that it would produce a 10% return
on today's equity base: That was in 2007 when Deutsche was one of
the most highly leveraged banks in the world.
Deutsche's problem isn't that it can't survive, it is that few
investors will be interested when it does.
Write to Paul J. Davies at paul.davies@wsj.com
(END) Dow Jones Newswires
September 27, 2016 10:25 ET (14:25 GMT)
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