Deutsche eases capital targets and increases loan loss provisions
Deutsche Bank has more than tripled its provisions for bad debts and will suspend capital targets as Germany’s biggest lender prepares for a surge in credit demand during the coronavirus crisis, the bank announced on Sunday evening.
In a statement outlining better-than-expected first quarter earnings, Deutsche said it recorded 500 million euros in provisions for credit losses in the three months, compared to 140 million euros in the same period last year. .
Like its American and European counterparts, including UniCredit and Credit Suisse, which gave an initial indication of provisions last week, Deutsche anticipates a increase in loan losses as the coronavirus pandemic casts serious doubts on the ability of consumers and businesses to pay their debt.
In Sunday’s statement, Deutsche said it was “reviewing” its capital and leverage ratio targets “in anticipation of business opportunities and elevated customer demand and in light of the current macroeconomic environment.”
The German lender has made maintaining high ratios – including pledging to maintain its common equity tier 1 ratio, a key measure of financial strength, above 12.5% of risk-weighted assets – a central element of his last turn around plan. It seeks to restore the confidence of investors marked by nearly 30 billion euros in fundraising since 2010.
“We are firmly committed to mobilizing our balance sheet to support our customers, who need us even more,” Chief Executive Christian Sewing said in the statement. “Our decision to do so means that our Common Equity Tier 1 ratio could temporarily fall below our minimum target of 12.5%, without weakening our strong balance sheet.”
Anke Reingen, an analyst at RBC Capital Markets, called the bank’s decision to officially drop its 12.5% target “worrying.” She wrote in a note to clients: “The challenge will be for [Deutsche Bank] to rebuild the CET 1 ratio given the low profitability”.
Shares of Germany’s biggest lender, which have lost more than 45% since mid-February, rebounded more than 10% in early trading to €6.04 after the bank reported net profit of €66 million. euros for the quarter. Analysts expected a loss of 387 million euros.
Deutsche has not yet broken down the revenue mix. It is expected to report results on Wednesday, but released key numbers after a board meeting on Sunday evening because they differed significantly from analysts’ expectations, according to a spokesman.
Andrew Coombs, an analyst at Citi, said Deutsche’s first quarter results were “reassuring”, adding that he did not see “an imminent threat” of a further capital raise or a suspension of coupon payments. on AT1s, the riskiest form of banking. debt.
The Financial Times reported earlier this month that Deutsche is revisit its strategic plan, which targets 18,000 job cuts by 2022.
Deutsche also said it was “unlikely” to meet its 2020 target of having a leverage ratio of 4.5%, a level that implies €45 of equity per €1,000 of assets.
Mr Sewing had earlier sworn that the German lender would go “on the offensive” in 2020. It is expected to follow its American rivals in announcing a rise in trade and an increase in loans during the first quarter, as corporate clients dip into their revolving lines of credit in order to have money to trade during the coronavirus crisis.
An increase in lending reduces a bank’s capital ratios, since the ratios are calculated as capital divided by a risk-based measure of assets.
Deutsche said its CET1 ratio fell to 12.8% at the end of March, in line with analysts’ expectations and comfortably above its regulatory minimum of 10.4%.
The German lender said group profit for the first quarter was 206 million euros on a pre-tax basis, better than consensus expectations for a pre-tax loss of 269 million euros but worse than pre-tax profit taxes of 292 million euros he made in the same period a year earlier.
Deutsche said it remained committed to its other turnaround targets, including cost reductions, and its 2022 capital and leverage targets remained in place.