July 9, 2019 / 2:03 PM / 10 days ago

Breakingviews - Deutsche creditors give ECB charity short shrift

People walk past a Deutsche Bank office in London, Britain July 8, 2019. REUTERS/Simon Dawson

LONDON (Reuters Breakingviews) - When in need, help can come from unexpected places. Just ask Christian Sewing. As part of the Deutsche Bank chief executive’s bumper restructuring announced on Sunday, the European Central Bank allowed the lender to cut its common equity Tier 1 ratio target by 50 basis points. A sharp uptick in the yields of Deutsche’s equity-like debt instruments implies this is a mixed blessing. 

On one level, the regulator’s decision makes sense. Deutsche already has a CET1 ratio of 13.7%, among the highest in its peer group. The lender’s global rivals – including Barclays, Credit Suisse, BNP Paribas and Société Générale – operate with CET1 ratios of 11.7%-13%. Deutsche’s new lower management CET1 ratio target of 12.5% releases 4.2 billion euros which can soak up restructuring charges, decreasing the potential need for Sewing to tap shareholders in what would be a deeply dilutive capital raise. Given that the ECB benefits from a slimmed-down and safer Deutsche, its charity is understandable.

Still, that could mean Deutsche’s buffer to its regulatory minimum requirement of 11.8% shrinks to just 2.4 billion euros. That’s one reason why yields on its riskier additional Tier 1 debt, whose coupon payments would be threatened if Deutsche sunk below the lower threshold, shot up by around 3 percentage points to over 12% on July 9, according to Refinitiv data. Another is uncertainty over whether the ECB will allow the bank to operate with such a low safety cushion if Sewing’s gambit doesn’t work.  

For the plan to succeed the Deutsche boss needs minimal losses in his run-off unit and his remaining businesses to grow revenue at around 2% annually until 2022 – a big ask. That is why ratings agency Moody’s was more cautious: it said they would wait for more tangible results before revising Deutsche’s current negative outlook.

Either way, the ECB’s decision will have raised the eyebrows of Deutsche’s competitors. True, none of them are so desperate they have to fire a fifth of their workforces and put a similar proportion of their balance sheets into run-off. But they will be interested to know if Deutsche’s regulatory leg-up is a one-off, and if not whether the supervisor might look the other way to help consolidation happen. The worst-case scenario is that banks feel emboldened to ask for special treatment – and Deutsche’s overhaul fails anyway.

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