Deutsche Bank's Ackermann Skirts Capital Problem

Published: Feb 02, 2012

By Simon Nixon
A DOW JONES COLUMN


Josef Ackermann can relax: Barring disaster, he can now look forward to retiring as chief executive of Deutsche Bank in May without having to raise equity. Despite a EUR3.2 billion ($4.2 billion) capital hole under the European Banking Authority's July 2011 stress tests, the German bank reported a core Tier 1 equity ratio of 9.5% on Dec. 31, well above the 9% stress-test threshold, putting immediate concerns over its capital to rest.

But will his successors, co-chief executives-designate Anshu Jain and Jurgen Fitschen, be so lucky? While they should be able to avoid launching a rights issue this year, questions over Deutsche's capital base are likely to continue to dog the bank.

The problem is Deutsche's weak capital position under the Basel III rules. Based on average analyst earnings estimates, Deutsche says it will have core Tier 1 equity of EUR43 billion on Jan. 1, 2013, rising to EUR47 billion at year end. Assuming no growth in the balance sheet, risk-weighted assets will rise by EUR105 billion to EUR499 billion, largely reflecting the higher capital charges on its legacy securitization exposures. So its core Tier 1 ratio under the new rules will be about 8.5% at the start of the year, rising to about 9.5% by the end.

That looks weak compared to many European banks that are targeting 10% ratios. Yet even this doesn't tell the full story. Unlike many peers, Deutsche assumes the full impact of Basel III is phased in over six years to 2019, as the rules allow. On a fully loaded basis, however, Deutsche's core Tier 1 ratio at the end of 2013 would fall to just 7.7%, according to Credit Suisse research. That would put it close to the bottom of the sector. Some analysts also question how Deutsche can generate earnings growth without increasing risk-weighted assets.

Deutsche insists none of its businesses will face capital constraints. Indeed, internal forecasts show the Basel III core Tier 1 ratio being above 9% on Jan. 1, 2013, creating scope to grow the balance sheet, according to someone familiar with the bank's plans. Crucially, Deutsche is under no pressure from credit markets to raise capital; it continues to enjoy relatively low funding costs.

But Deutsche is betting heavily on a recovery in investment-banking revenues, including market-share gains as competitors quit the sector. A repeat of the tough second half of 2011, when the investment bank reported a loss, could throw its plans off course. So, too, might a new round of stress tests that used a 9% core Tier 1 ratio on a Basel III basis as the threshold.

That said, if Mr. Jain and Mr. Fitschen do raise equity, it is more likely to be to fund an acquisition, taking advantages of the opportunities thrown up by upheavals in the sector. In doing so, they would be following a familiar Deutsche path of stealthy capital raising throughout the crisis. Mr. Ackermann would approve.

(Simon Nixon is European editor of Heard on the Street. He can be contacted on +44 207 842 9206 and simon.nixon@wsj.com)