Deutsche Bank AG (DBK), continental Europe’s biggest bank, was cut to neutral from overweight by JPMorgan Chase & Co., which said tighter regulation threatens capital levels.
The Basel Committee on Banking Supervision’s proposed revision to a securitization framework governing riskier assets would reduce Frankfurt-based Deutsche Bank’s common equity Tier 1 capital ratio under Basel III rules to as little as 8.6 percent in 2014 from 10.2 percent, JPMorgan analysts including Kian Abouhossein said in a report to clients from London today.
Reversing an increase to Deutsche Bank’s rating three weeks ago, JPMorgan said a 3 billion-euro ($3.9 billion) capital increase on April 30 “was clearly a defensive move” to offset the impact of “potential capital ‘curve balls’ such as Basel securitization proposals.” Regulators may publish the final rules next year, JPMorgan said.
Deutsche Bank fell as much as 3.6 percent to 36.16 euros in Frankfurt trading, heading for the biggest drop in a month. The stock will trade at “a high implied risk premium” compared with other European banks, rising to 38 euros by December, the analysts said. JPMorgan prefers Barclays Plc (BARC), they said.
Regulators are overhauling capital rules after widespread securitization, or repackaged assets that are sliced up and sold on to clients, in the U.S. mortgage market contributed to the financial crisis by spreading risk from lenders to the so-called shadow-banking industry. Banks have written to the Basel committee to say the plans, which will force them to hold more reserves against such products, will tie up capital and starve the economy of credit.
Deutsche Bank would be the most affected of seven European banks analyzed by JPMorgan under its “worst case” scenario. Credit Suisse Group AG of Zurich would be the least affected, with its common equity ratio falling 0.2 percentage points, the report shows.
In the “best case,” Barclays would see the measure of its reserves rise 0.2 percentage points while France’s Credit Agricole SA (ACA) would post the group’s biggest decline at 0.3 percentage points, according to JPMorgan. That scenario is “highly unlikely” and the regulation will probably be closer to the bank’s negative option, they wrote.
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