FRANKFURT Deutsche Bank (DBKGn.DE) may need to set aside billions of euros in additional capital under a proposal from European regulators that could affect the bank's efforts to strengthen its balance sheet and put pressure on dividends.
Analysts estimated Germany's biggest bank by market value might need as much as 2.2 billion euros ($3.02 billion) in extra capital to meet the tough new rule from the European Banking Authority, the regulator for banks in the European Union.
The proposal, made last week, would impose detailed standards on how banks value certain assets on their books and requires them to set aside additional capital to absorb unexpected losses.
Banks will, for example, need to use conservative valuations, seek independent price verification and consider additional costs when marking the value of their assets to market.
Some European Union countries, including Germany, have not forced banks to apply such capital rules, even though they have been in the EBA's pipeline for some time.
Britain introduced them ahead of other countries to help to strengthen UK banks and prevent future bank bailouts paid for by taxpayers. The impact of these rules on Barclays (BARC.L), for example, was about 2.1 billion pounds.
"This is another major issue for Deutsche Bank to deal with," Christopher Wheeler analyst at Mediobanca in London said. "Deutsche Bank has done lot of great work on capital but a lot of that has been undone by the rising cost of litigation," Wheeler said.
Deutsche Bank expects to pay more hefty fines for legal claims in the wake of the financial crisis. It has paid more than 5 billion euros in fines over the past two years.
Analysts said Deutsche Bank could raise the extra capital to meet the regulator's latest requirement through retained earnings, cost cuts and by shrinking its balance sheet. Analysts do not expect the bank to have to return to the equity market to raise the money.
Deutsche raised about 3 billion euros nearly a year ago via a share issue that put the bank on course to meet global bank capital rules designed to strengthen the industry after the financial crisis.
Deutsche aims to ensure its main measure of balance sheet strength - known as the Basel III common equity tier one ratio, gets to 10 percent by 2015. This ratio measures loss-absorbing capital as a percentage of a bank's risk-weighted assets.
The ratio stood at 9.7 percent at the end of 2013 but the bank has warned repeatedly that it may fluctuate between now and the end of the year due to changing regulatory requirements.
Kian Abouhossein analyst at JPMorgan estimated that Deutsche needed to add 2.2 billion euros to capital reserves because of the EBA proposals and, as a result, would meet its own capital target one year later than planned. Deutsche's common equity tier one ratio would fall to 9.2 percent in the process, he said.
Deutsche is also likely to keep its dividend at a rock-bottom 75 cents a share for another three years, Abouhossein wrote in a note.
The bank is expected to raise its dividend this year to 0.90 euros a share then to 1.45 euros per share by 2016, according to Thomson Reuters estimates.
The final version of the EBA's proposal will aim to harmonize bank safety standards across the European Union. An EBA impact study concluded that the proposal would reduce banks' regulatory capital by 1.5 percent.
"These rules will be directly binding and exactly the same for all member states," EBA spokeswoman Franca Congiu said.
Deutsche Bank declined to comment for this story.
($1 = 0.7277 Euros)
(Reporting by Thomas Atkins; editing by Jonathan Gould and Jane Merriman)