Feb 01 - Fitch Ratings views Deutsche Bank AG's Q412 results as ratings neutral. They illustrate the many on-going structural challenges facing the group while also demonstrating some progress in addressing them.
A Q412 group pre-tax loss of EUR2.6bn was reported after EUR1.9 goodwill impairment and EUR1bn net new reserves for projected litigation and regulatory expenses. Net of these, the group underlying result for the quarter was EUR287m, balancing a EUR978 profit in core businesses with a EUR692bn loss from the bank's non-core unit. The underlying core bank profit is low compared with recent quarters (Q112 EUR2.4bn, Q212 EUR1.2bn, Q312 EUR1.6bn) and Fitch's ratings considerations include an expectation that this will improve and not become a run-rate.
Fitch affirmed Deutsche Bank's ratings in October 2012, based on the agency's expectation that the bank would quickly improve capital ratios to narrow the gap to peers. Deutsche Bank has delivered this improvement ahead of schedule, indicating a 'fully-loaded' Basel III Common Equity Tier 1 (B3 CET1) ratio of 8.0% as of 31 December 2012, three months ahead of prior indications and within sight of (albeit still lower than) the level indicated by leading peers that have already reported Q412 results (e.g. JP Morgan 8.7%). The bank was able to improve capitalisation despite the substantial loss in the quarter, largely because impairments of goodwill and intangibles (primarily relating to Bankers Trust and Scudder) are neutral to capitalisation, given that they are fully deducted both from Basel III capital and from Fitch's own core capital measure.
Deutsche Bank's ratio benefited particularly from a EUR500m reduction in capital deductions relating to sales and hedging of securitisation assets and a EUR11.1bn decrease in market risk-weighted assets, which largely reflected the regulator's reduction of its value-at-risk multiplier for Deutsche Bank from 5.5 to 4.0. This brings Deutsche Bank's multiplier more into line with large European bank peers', which are mostly between 3 and 4.
Fitch continues to view Deutsche Bank's funding and liquidity a relative strength and notes liquidity reserves remain high, above EUR230bn (up from EUR210bn+ at September 2012, though now including excess liquidity from Postbank). First time public disclosure puts the liquidity coverage ratio (LCR) above 95%, with management indicating they expect to reach 100% by end-2013 and will maintain their liquidity at a high level despite softened Basel requirements.
Fixed income sales and trading revenues of EUR1.4bn declined 43% vs. Q312 and equity sales and trading revenues of EUR0.5bn declined 16% vs. Q312, in both cases a weaker end to the year than seen at US peers, albeit consistent with the exaggerated seasonality Deutsche Bank has exhibited historically. First time disclosure of compensation expense within the Corporate Banking and Securities (CBS) division reveals a compensation-to-revenue ratio of 41% for the full year, similar to the levels typically reported by fixed-income orientated peers. Group variable compensation in 2012 declined 11% vs. the prior year, while outstanding deferred compensation at year-end is down 16% vs. the equivalent prior-year figure. In addition to the afore-mentioned litigation and intangible impairment items, various restructuring-type expenses drove Q412 losses in all divisions except Private and Business Customers (PBC) which posted a solid EUR 287m pre-tax profit.
Deutsche Bank indicated that it would recognise a EUR2bn to EUR2.5bn impairment of the carrying value of its US holding company within the parent's accounts that are prepared under German accounting standards (HGB), a reflection of potential further restructuring of its US operations, partly in response to revised US capital requirements proposed by the Fed. While not affecting consolidated capital ratios or IFRS accounts, Fitch notes this event as a symptom of the challenges that emerging localised corporate structure regulations present to globally active financial institutions. Evolution of national regulatory requirements is an area Fitch is monitoring carefully in relation to ratings. These have the potential to adversely impact the credit rating both from the perspective of resolvability (i.e. the ability and propensity for home states and parent banks to support various entities within the group) but also the viability of global business model to the extent that less-efficient structures will affect the profitability of key activities.
A provision for significant litigation of EUR1bn taken in Q412 was spread across the divisions, an indicator of the diversity of legacy cases which present a contingent threat to capital resources but also, indirectly, have potential to shape political opinion and, therefore, feed back into the corporate structure challenges.