Deutsche Bank’s Tier 1 Capital is 8% under Basel III but critics note a bit of a trick

The New York Times notes that while Deutsche Bank’s Tier 1 capital ratio hit 8% as noted in a January 31, 2013 press release, the bank used a bit of a trick to get there. As a result, it will be harder for DB to get its Tier 1 ratio much higher in the near future – further improvements will be harder work.

According to the New York Times article:

“Tweaking models accounted for about a quarter of the 55 billion euro reduction in Deutsche Bank’s risk-weighted assets in the fourth quarter, with active disposals of unwanted holdings representing 60 percent of the reduction. There will be less low-hanging fruit in future. And reviewing risk is almost as one-off a process as the hefty restructuring charges that resulted in Deutsche Bank booking a 2.6 billion euro quarterly loss.

“Deutsche Bank hails these moves as an historic reconfiguration. But the renewal process is far from complete, and faces threats. Basel-based regulators are set to rule on whether standardized risk models should be used across the board. Deutsche Bank would be the worst hit of European banks in that situation, with likely inflation in risk-weighted assets of 52 percent, according to research by Espirito Santo Investment Bank. Deutsche Bank’s current capital sheen could fade fast.”

Here is what Deutsche Bank says on their website about their strategy for the next two years:

– Management proceeds with implementation of new strategy, including establishing Non-Core Operations Unit (NCOU) and executing Operational Excellence Program (OpEx).
– Actions taken are reflected in specific accounting effects, notably impairments of goodwill and other intangible assets and further specific charges. The results were also impacted by significant litigation related charges. – Together, these items resulted in a EUR 2.6 billion loss before income taxes in 4Q2012.
– 4Q2012 income before income taxes (IBIT), after adjusting for the impairments of goodwill and other intangible assets and significant litigation related charges, which together amount to EUR 2.9 billion, was EUR 0.3 billion, to which the Core Bank contributed EUR 1.0 billion.
– 2012 IBIT, after adjusting for the aforementioned charges, which together amount to EUR 3.5 billion for the full year, was EUR 4.9 billion, to which the Core Bank contributed EUR 6.5 billion.
At the same time management has accelerated capital formation and de-risking, which resulted in a pro-forma Basel 3 fully-loaded Core Tier 1 capital ratio of 8.0% at 31 December 2012. Management now aims to achieve 8.5% as of 31 March 2013.
– OpEx on track with EUR 0.4 billion of savings realized in second half of 2012
– Implementation of a clear framework for a deep long-term cultural change
– Creation of sustainable and respected compensation practices
– Full year variable compensation relative to revenues decreased to longtime low of 9%
– Cash dividend of EUR 0.75 per share recommended

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