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Deutsche Bank Gambles on a Big Dividend

Stocks in this article: DB C BAC CS BCS UBS

While Abouhossein adds that Deutsche Bank's valuation discount due to its capital position should improve, given co-CEO Fritschen and Jain's work, the analyst highlights mark-to-market writedowns on risky pre-crisis mortgage and buyout loans as a continued risk for the bank.

Others remain concerned about the bank's current progress on capital.

A proposal under consideration by the Federal Reserve to boost the cash balances of foreign banks operating in the U.S. might disadvantage conglomerates like Deutsche Bank, according to a Thursday analysis by Fitch Ratings.

"Deutsche Bank's capitalisation is weaker than most of its global peers on a "look-through" Basel III common equity Tier 1 ratio and adjusted-leverage basis," wrote Fitch Ratings, in a note that expressed optimism the bank's capital position will continue to improve.

MacQuarie Bank analyst Piers Brown told Bloomberg that a sizeable part of Deutsche Bank's 80 billion euros in asset reductions involved changes to its accounting models rather than actual disposals.

"There is a lot of inherent suspicion about models currently. It is not helpful that a lot of the improvement is coming through that," Brown told Bloomberg.

A look at Deutsche Bank's capital and earnings relative to U.S. peers indicates the banking conglomerate is still allowed to take a far more aggressive stance on cash dividends. The figures also may indicate a continued divergence in the seriousness of stress-test methodologies and post-crisis recapitalization efforts in the U.S. and Europe.

While the Fed's tests propelled U.S. lenders into dilutive equity offerings years ago, some still expect large equity offerings remain in the cards.

Abouhossein of JPMorgan, Fitch Ratings and a Reuters Breakingviews analysis both highlight a shortfall at Deutsche Bank's U.S. investment banking subsidiary as a particular concern.

In July 2012, Credit Suisse (CS), another European mega bank that continues to operate in the U.S., surprised investors by announcing a $15 billion capital increase in the summer and slashed its dividend, as many analysts had expected.

The Fed recently said U.S. banks' stress tests will be released in March, while the European Banking Authority is expected to release 2013 stress tests for EU-based lenders in the fall.

As U.S. lenders appeal to raise their cash payouts to shareholders, investors across the Altantic may want to question whether the status quo is sustainable.

-- Written by Antoine Gara in New York

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