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Deutsche Bank (DB) - Get Deutsche Bank AG Report shares posted solid early gains in early European trading Friday despite its U.S. division failing the second phase of the Federal Reserve's stress tests, a decision that will likely prevent it from paying a dividend to the parent German lender.
The Fed said it had concerns with the way Deutsche Bank's U.S. division forecast future revenues in the face of a theoretical global recession, and a spike in domestic unemployment, and said there were "material weaknesses" its data capabilities and capital planning processes. The result, however, was widely expected by investors, who had taken the stock to a record low earlier this week, and thus didn't extend declines for the lender in early Frankfurt trading.
"DB USA has made significant investments to improve its capital planning capabilities as well as controls and infrastructure," Deutsche Bank said in a statement late Thursday. "DBUSA continues to make progress across a range of programs and will continue to build on these efforts and to engage constructively with regulators to meet both internal and regulatory expectations."
Deutsche Bank shares, which rose as much as 4% in early trading, pared gains to around a 1.05% and were changing hands at €9.15 each by mid-day in Fankfurt, a move that leaves it down nearly 43% for the year.
The Fed also identified "approaches and assumptions used to forecast revenues and losses arising from many of its key business lines" and in its risk-management", the central bank said.
"Together, these weaknesses raise concerns about DB USA's ability to effectively determine its capital needs on a forward-looking basis," the Fed added.
The results may hasten plans by new CEO Christian Sewing to scale-down the U.S. operations and accelerate cost cost cuts at Germany's largest lender, something investors have been demanding both before and after the departure of ousted former boss John Cryan.
Deutsche Bank said last month that its global staffing numbers would fall "well below 90,000" following the job cuts, most of which would take place in London and New York, adding that other business reductions and restructuring would reduce the bank's overall leverage by 10%, or €100 billion, by the end of the year.
The bank's overall cost base is expected to fall to €23 billion this year and €22 billion in 2019, Deutsche Bank said, although "no further significant disposals" are currently planned.
Investors have grown increasingly wary of Deutsche Bank's €48 trillion derivatives book and the risks associated with unwinding it as its global business operations scale-down under the turnaround plans first unveiled by Cryan and now supported by incoming boss Sewing.