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Deutsche Bank Should Cut Its Dividend

While the Fed's tests propelled U.S. lenders into dilutive equity offerings years ago, some analysts say a large equity offering remains in the cards for Deutsche Bank.

JPMorgan bank analyst Kian Abouhossein, Fitch Ratings and a Reuters Breakingviews analysis all highlight a shortfall at Deutsche Bank's U.S. investment banking subsidiary as an added concern to the bank's capital position that's yet to be addressed by co-heads Jürgen Fitschen and Anshu Jain, who are ahead of schedule on restructuring and recapitalization targets.

Deutsche plans a 90 billion euro reduction in risky assets, layoffs and an exit from some capital-intensive businesses, in coming years.

While Abouhossein of JPMorgan took Deutsche Bank's initial 2012 earnings to reflect improving capital under Fritschen and Jain, the analyst highlighted mark-to-market writedowns on risky pre-crisis mortgage and buyout loans as a continued risk for the bank.

Wednesday's announcement appears to vindicate such concerns.

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

"Deutsche Bank's capitalization 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.

At a time when eurozone banks are gorging on emergency European Central Bank loans as a way to handle asset sales, writedowns, rising non-performing loans and bailout politics in countries such as Cyprus and Italy, the dividend payout of Deutsche Bank and lenders across the region are a reminder of what put banks into a state of crisis five years ago.

In fact, payouts as high as 10% at the likes of Santander, 5% at BBVA and a forecast of a 4% payout at Societe Generale indicate that European lenders are in a race to the bottom when it comes to capital planning.

Given Deutsche Bank's size and its shaky finances, we should all hope that the lender doesn't finish at the head of Europe's dividend heat.

It's time for Deutsche Bank to cut its dividend and wait another day to make large payouts to investors.

-- Written by Antoine Gara in New York

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