Deutsche Bank (DB) - Get Report shares shot to the top of the European market Friday after the lender's U.S. operations passed Federal Reserve stress tests that will allow it to boost investor payouts and return some profits to the European lender's home base.
Clearing the Fed's Comprehensive Capital Analysis and Review, an annual test of a bank's ability to weather a sharp economic downturn, could be a major step in CEO Christian Sewing's sputtering turnaround plans, which have stalled in part because of concerns for the health of its U.S. operations. The Fed's passing grade for Deutsche Bank also marks a stark contrast to last year's assessment, which cited "widespread and critical deficiencies" in the lender's capital plans.
"This is excellent news," Sewing told employees in a memo published late Thursday. "Achieving success here was one of the key goals we set a year ago. And it is a huge step forward for our business in the US and globally. A strong operating platform in the Americas is essential to our clients."
Deutsche Bank shares were marked 3.84% higher at the start of trading in Frankfurt, outpacing a 0.46% gain for the DAX performance index and changing hands at €6.81 each.
The tests said that Deutsche Bank's U.S. operations would have a common equity tier 1 capital that would "comfortably exceed" minimum requirements in an adverse economic scenario, "and would not fall below 14.8% at any time over the nine-quarter planning horizon", the bank said in a statement.
The U.S. division had $133 billion in assets as of March 31, Deutsche Bank said, representing around 8% of the lender's global balance sheet.
The stress test results mark a rare headline win for the struggling German lender, whose share price has fallen nearly 40% since last summer amid myriad concerns related to its business ethics, balance sheet, costs controls and failed merger talks with domestic rival Commerzbank AG (CRZBY) .
Recent progress in establishing a so-called "bad bank" for €50 billion worth of under-performing assets, mostly longer-date derivatives, as well as pull back from equity and fixed income trading outside of Europe as it moves to slim costs, reduce risk and return to profitability, have been undone by reports linking the lender to money laundering and dealings with President Donald Trump's now defunct Trump Foundation.
Earlier this month, Senate lawmakers Chris Van Hollen and Sherrod Brown wrote to the U.S. Federal Reserve and urged it to investigate Deutsche Bank's relationship with both Kushner and the President. House Democrats have also subpoenaed the bank for financial records linked to Trump and his family and businesses.
Those concerns, as well as a more pronounced slowdown in Germany over the first half of this year, have pushed the country's Financial Stability Board to have domestic lenders set aside nearly $6 billion in extra cash, starting this summer, as a precaution against further risks.