* Deutsche core tier one 8 percent vs target 7.2 percent
* Analysts question Deutsche's Risk Weighed Assets model
* Finance chief defends bank's methodology as rigorous
* Attributes improvement to granular focus on assets' risk
By Laura Noonan
LONDON, Jan 31 The sharp improvement in Deutsche
Bank's capital ratio has revived debate about the
role banks' own risk models play in deciding whether or not they
have sufficient reserves.
Germany's largest lender, one of Europe's most weakly
capitalised major banks, beat expectations on Thursday when it
reported an 8 percent core tier one capital ratio for the end of
2012, helping to drive its share price close to one-year highs.
This compared to a target of 7.2 percent and 8.5 percent by
the end of this quarter.
But on a conference call after the results, analysts
questioned the way Deutsche had arrived at the 8 percent figure,
in particular, they way the model changes helped them cut their
Risk Weighed Assets (RWA) by 55 billion euros ($74.7 billion) in
the fourth quarter.
"They're already one of the most aggressive users of
internal models. For them to do that again (in the fourth
quarter) really stretches credibility," said Andrew Lim, a
London-based analyst at Espirito Santo, which has a "sell"
recommendation on the German bank.
Deutsche's finance chief Stefan Krause defended the bank's
methodology on the analyst call and said the bank's models would
hold up amid moves to harmonize RWAs globally.
He said he was very comfortable with how the bank would
stack up against its peers when international regulators examine
approaches to risk weighting.
"They (the results) will prove that these accusations to
Deutsche Bank's reliance on modelling might not be as true, and
that maybe some of our other competitors are more exposed to
this than we are," he said.
Banks, with the approval of regulators, can use their own
models to assess how risky their assets are and assign a 'risk
weighting' to various categories of loans and bonds.
These RWAs are used as a yardstick for the bank's capital,
since capital demands are capital as a percentage of RWAs.
Krause said banks got lower risk charges by taking a more
"granular" look at their books.
"Don't forget also that it takes a long time and a
continuous proof between standardized and our individual models
to make sure that our modelling of risk corresponds," he told
Analysts at Credit Suisse estimated that 41 billion euros of
the fourth-quarter drop in Deutsche's RWAs was due to changes in
Deutsche's modelling and warned that some of those cuts may have
to be reversed if regulators harmonise how banks assess their
Banks have been cutting RWAs in a bid to hit Basel III
capital targets, which are being phased in from 2014, with
ratings agency telling Reuters last week that commercial banks'
RWAs had fallen from 65 percent of total assets in 2007 to 35
percent by June 2012.
At Deutsche, after the latest round of model changes, risk
weighted assets have fallen to about 19 percent of the bank's
total assets, as measured under the incoming Basel III system.
Under the old Basel 2.5 system, they came in at just under
That compares with Royal Bank of Scotland, whose
RWAs equalled 35 percent of the bank's total assets in
September, and Barclay's, whose RWAs equalled 24
percent at the same point, based on Basel 2.5.
At Credit Suisse, RWAs were about 23 percent of
total assets by September. At BNP Paribas', the figure
came in at 29 percent at the half year point.
Although Switzerland's UBS had RWAs equal to just
15 percent of total assets in September it is Deutsche which
appears to be taking the heaviest flak.
This partly reflects the candid disclosure Deutsche has made
on its RWAs.
Institutions aren't required to disclose what drives changes
in risk weighted assets, but Deutsche has done so anyway,
telling investors how much of the reduction was due to asset
sales and how much of it was due to model changes.
"The bottom line is we can only go on what they have given
us," said Chris Wheeler, analyst at Mediobanca.