* Deutsche Bank plans to shrink cash pile, non-core assets
* Plans to cut balance sheet by 20 pct by end-2015 - FT
* Sees leverage ratio setting wrong incentive
* Shares up 1.4 percent at 1208 GMT
FRANKFURT, July 22 (Reuters) - Deutsche Bank, plans to shrink its balance sheet substantially over the next two and a half years to comply with new rules to make banks more crisis-resistant, sources familiar with the bank said on Monday.
Germany’s biggest bank expects to give details of its plans when it presents second-quarter results on Tuesday, one of the sources said.
The Financial Times reported that Deutsche Bank plans to cut its balance sheet by up to 20 percent to reach a minimum 3 percent leverage ratio by the end of 2015. The paper cited people briefed on the plans.
Deutsche Bank declined to comment.
These plans follow the latest action by financial regulators to ensure banks can cope with future problems themselves rather than rely on the taxpayer-funded bailouts that followed the 2007-2009 financial crisis.
Regulators are currently focused on keeping bank risks in check via banks’ leverage ratio, which measures a bank’s assets (loans etc) against its shareholder equity without having to rely on the bank’s own assessment of how risky its assets are.
They want banks to have a leverage ratio of 3 percent by 2018, with mandatory reporting of the figure to start in 2015. The exact way to calculate it is still under review.
One way a bank can comply is to cut its balance sheet.
Deutsche Bank’s Chief Financial Officer Stefan Krause told German daily Boersen-Zeitung this month the bank aims to cut its cash pile, decrease non-core assets and look at reducing other activities.
“In the (financial) crisis, we have held a relatively large liquidity buffer,” Krause told the paper. “With the introduction of a non risk-weighted leverage ratio an incentive is created to reduce liquid assets in order to shrink the balance sheet. That is exactly the wrong approach,” he said.
Deutsche Bank’s plans to trim its balance sheet will likely not have a large impact on earnings, the sources familiar with the bank said.
Analysts took the opposite view.
Philipp Haessler from brokerage Equinet said speeding up shrinking the balance sheet was probably a good idea but agreed that earnings were unlikely to be spared.
“Reducing its 240 billion euro cash pile by half or so won’t hurt Deutsche Bank’s profitability much. But reducing the (90 billion euro) non-core unit or trimming the loan book will of course have a negative effect on earnings,” he said.
Chris Wheeler analyst from Mediobanca said: “It seems the ‘hunger march’ the CEO said was over at the end of Q1 2013 in terms of capital is now starting again in terms of leverage.” He said he wondered whether Germany’s financial watchdog Bafin would allow the bank to shed a big part of its liquidity pool.
“The regulator has no interest in balance sheet reductions if this has negative implications for the real economy,” Bafin’s head of banking supervision, Raimund Roeseler, said, adding that currently it saw no signs of a credit crunch due to deleveraging efforts of banks.
Deutsche Bank recently said its leverage ratio was 2.1 percent using European IFRS accounting rules and said it was 4.5 percent using U.S. generally accepted accounting principles.
The difference is due to the way derivatives on a bank’s books are measured.
Deutsche’s estimated ratio of equity to assets is the second-lowest of 18 banks ranked by Morgan Stanley analysts.
Thomas Hoenig, a top U.S. banking regulator last month called Deutsche Bank “horribly undercapitalized.”
Deutsche Bank had responded saying it regarded the leverage ratio as a “misleading measure” when used on its own, and that according to the global banking rules known as Basel III, it was currently one of the best capitalised banks in the world, following a 3-billion-euro cap hike three months ago.
Basel III compares a bank’s shareholder equity to its risk-weighted assets and lets banks use their own measurements of how risky their loans and securities are.
The bank’s shares rose 1.4 percent by 1208 GMT, making it the second-biggest gainer in Germany’s blue-chip index Dax, which was flat.