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Fitch: Deutsche Bank's 1Q14 Capital Ratio Changes Highlight Regulatory Headwinds
April 29, 2014 / 5:22 PM / 3 years ago

Fitch: Deutsche Bank's 1Q14 Capital Ratio Changes Highlight Regulatory Headwinds

(The following statement was released by the rating agency) LONDON/FRANKFURT, April 29 (Fitch) Fitch Ratings says that the decline in Deutsche Bank AG's (A+/Negative/a) regulatory capital ratios highlights the regulatory headwinds the bank continues to face. In 1Q14, the bank's fully applied Basel III common equity tier 1 (CET1) ratios dropped by a modest 20bp to 9.5% at end-March, but the ratio could decline further during 2014 as new regulations are implemented. The decline in the CET1 ratio has no immediate effect on the bank's ratings as Deutsche Bank remains committed to achieving a 10% fully applied CET1 ratio by end-March 2015 and does not rule out a capital increase should measures to strengthen capital organically be insufficient. Maintaining sound capitalisation is an important driver for the bank's Viability Rating (VR), and slippage in capital ratios compared to its peers would put pressure on the VR. The Outlook on Deutsche Bank's support-driven Long-term Issuer Default Rating (IDR) is Negative to reflect our expectation of reducing government support. Deutsche Bank also announced that it intends to issue about EUR1.5bn additional Tier 1 instruments in the coming weeks as part of its plan to raise about EUR5bn of this form of hybrid capital by 2015. Deutsche Bank generated EUR1.8bn pre-tax profit adjusted for EUR96m credit valuation adjustments, debit valuation adjustments and fair value adjustments, about 22% below similarly adjusted 1Q13 pre-tax profit. The main driver for the decline was a 10% yoy drop in net revenue while operating expenses declined by only 3%. Deutsche Bank expects operating expenses to remain flat for 2014 despite continued cost savings as costs related to regulatory requirements have increased. Reported personnel expenses are also expected to increase as the bank plans to increase the proportion of fixed salaries because of regulatory limitations on the proportion of variable compensation. On top of this, the bank also expects litigation costs, which in 1Q14 were zero, to remain high in 2014. Deutsche Bank's corporate banking and securities (CB&S) businesses generated EUR1.5bn pre-tax profit in 1Q14, 22% lower than in 1Q13. In line with its peers, the bank reported a yoy drop in fixed income sales and trading, which at about 16% excluding the effect of a transfer of commodities businesses to the non-core operations unit (NCOU), was however less pronounced than at most of its peers that have reported to date. Deutsche Bank saw solid performance of its rates business despite a difficult market environment, and flow credit performed well, while other credit segments and emerging markets saw a fall in revenue. Equities sales and trading remained broadly in line with 1Q13 results, but net revenue in origination and advisory declined 7%. Deutsche Bank's strong bias towards fixed income trading, where it generates about 60% of CB&S net revenue, means that fluctuations in debt sales and trading affect its pre-tax profit more than at peers that are more weighted towards equities trading. Deutsche Bank's private and business clients businesses generated EUR520m pre-tax profit in 1Q14, an increase of 8% compared to 1Q13. The improvement was driven by a EUR70m gain related to a business sale, but the bank also saw higher revenue from investment and insurance products while revenue from deposits and payments saw a small decline. Global transaction banking saw a 15% yoy increase in pre-tax profit to EUR367m in 1Q14, mainly because of lower loan impairment charges as net revenue remained under pressure. Deutsche asset and wealth management's pre-tax profit remained small at EUR169m, 23% lower than in 1Q13, and we do not expect the business to become a major contributor to the bank's earnings in the near future. We believe that Deutsche Bank's strong franchise in corporate and retail banking should enable it to generate sufficient earnings in these segments, particularly in domestic retail banking once it realises cost synergies and benefits from Deutsche Postbank's large customer base. Low interest rates are however denting net revenue in retail banking and in global transaction banking, and Deutsche Bank announced that it will be challenging to reach its profitability targets of EUR3bn pre-tax profit in private and business clients businesses and of EUR2.4bn in global transaction banking by 2015. We expect the bank to make further progress in its underlying cost efficiency after incurring further costs-to-achieve in its strategic plan in 2014, and failure to improve the profitability in retail banking would place the bank's VR under pressure. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Michael Dawson Kropf Senior Director +49 69 76 80 76 113 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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