Deutsche Bank's Capital Building Efforts in Spotlight
Germany's largest bank Deutsche Bank (DB) - Get Report is expected to record a second-quarter loss on Wednesday, when the Frankfurt bank announces its earnings. But investors' and analysts' eyes will mainly be on the success of its efforts to build its regulatory capital buffer.
The plan had been to use income from the sale of its 20% stake in Chinese lender Huaxia Bank within the second quarter, but that sale did not close in time. Analysts polled by Bloomberg believe the Tier 1 Capital ratio will rise to 10.8%, from the 10.7% recorded in March. But at the March level, Deutsche was still only the third lowest among Europe's 25 biggest publicly traded banks. While Tier 1 capital is still within the current regulatory minimum, it is below the ratio required by 2019.
Deutsche Bank CEO John Cryan said at the end of June his ongoing restructuring of the bank will not be far enough ahead to make 2016 a profitable year.
That would make 2016 the second year in a row when Deutsche Bank has made a full-year loss. Previously it had not lost money over the course of a full year since 2008.
Cryan has already guided that there will be no dividend this year. Earlier this month analysts at Barclays held their dividend estimate for the German bank at €0.75 for 2017.
Fears about Deutsche's safety, due to excessive leverage and exposure to derivatives, have prompted comparisons with Lehman Brothers, whose September 2008 collapse unleashed a global financial crisis.
Deutsche Bank, which TheStreet's Jim Cramer argued in an article in Real Money this month will never be allowed to fail, was recently rated by the International Monetary Fund as the riskiest globally significant investment bank. Its U.S. subsidiary Deutsche Bank Trust Corp. also failed the Federal Reserve's most recent stress test. Although the unit represented only about 15% of the German group's U.S. assets, the Fed said it would not be allowed to distribute cash to its parent.
Meanwhile, the results of a new round of European Union stress tests will be released later this week.
Deutsche Bank has been involved in a string of litigation issues. The latest came back to haunt it as recently as July 25, when a U.S. judge said the bank must face part of lawsuit brought by investors who claim they were deceived into buying more than $5.4 billion of preferred securities in the subprime mortgage market. Part of that lawsuit has been dismissed, but about $2.55 billion of the claims have not been dismissed.
Germany's second largest private sector commercial bank Commerzbank (CRZBF) , (CRZBY) on Monday released second-quarter figures showing an operating profit of €342 million and net profit attributable to shareholders of €209 million.
Both figures were in line with the analysts' consensus, according to the bank's own statement, although both are well down on the same quarter in 2015. Preliminary common equity Tier 1 ratio at the end of June was 11.6%, up from 10.5% at the same date last year, but down from 12% at the end of March this year.
The full results are due out on Aug. 2, but already the bank is reportedly planning to cut up to 20% of the 5,700 jobs at its "Mittelstand", or small to medium-sized businesses, unit to lessen the impact of low interest rates on its earnings.
Deutsche Bank finished the day down 1.8% at €12.89 in Frankfurt, while Commerzbank was down 2.3% at €5.59