Deutsche Bank AG (DBK), continental Europe’s biggest bank, said it will shrink its balance sheet by 250 billion euros ($332 billion), joining Barclays Plc (BARC) and UBS AG (UBSN) in seeking to comply with stricter capital rules.
Deutsche Bank will reduce leverage by changing the way it accounts for derivatives and by winding down a 73 billion-euro portfolio of assets, Chief Financial Officer Stefan Krause told investors on a conference call today. Krause announced the plan after the bank said net income slid 49 percent to 334 million euros, missing the average 767.6 million-euro estimate of nine analysts.
Co-Chief Executive Officer Anshu Jain has been offloading riskier assets, firing staff and raising capital by selling shares as lingering doubts about the ability of Europe’s banks to withstand another financial crisis prompted regulators and shareholders to demand stronger finances.
“Regulators, politicians and analysts have shifted their focus towards leverage ratios in the past few months,” Krause said. “We understand that market expectations and potential revisions to the current regulations may force us to reduce leverage further and we have all intentions to do so.”
The asset reduction compares with Deutsche Bank’s balance sheet of 1.58 trillion euros and will generate about 600 million euros in “up front” expenses, sapping pretax profit by 300 million euros, Krause said.
Barclays said today it will reduce leverage by raising 5.8 billion pounds ($8.9 billion) in a rights offering, cutting as much as 80 billion pounds of assets and selling 2 billion pounds of loss-absorbing securities. Zurich-based UBS will buy back a fund set up by the Swiss central bank five years ago to help it boost capital.
Deutsche Bank announced its plan to reduce leverage as an extra 630 billion euros that the bank decided set aside to meet potential litigation costs impacted profit.
Otto Dichtl, managing director at Stifel Nicolaus Europe Ltd., questioned Deutsche Bank’s plan to increase the leverage ratio, or capital the bank sets aside to cover assets such as loans, to levels recommended by the Basel Committee on Banking Supervision, which sets rules for the industry.
“It doesn’t look like there’s any big bang solution in the bag yet,” Dichtl said in an interview with Bloomberg Television’s Mark Barton. “Their principal idea is to reduce again the measurement base for the assets that go into this ratio. But it’s really a more marginal measure.”
Deutsche Bank slid as much as 4.8 percent to 34.33 euros in Frankfurt trading, heading for the biggest loss since February. Barclays dropped as much as 8.2 percent in London, the biggest decline in over a year. UBS rose as much as 3.2 percent, headed for the highest level since March 2011.
Some regulators are embracing leverage measurements as they question the weightings banks use to determine their risk and capital levels.
Deutsche Bank will probably have to delay dividends and set aside four years of profit to exceed a 3 percent goal for the leverage ratio, or the proportion of equity to assets, James Chappell, an analyst at Berenberg Bank in London, said in an e-mailed report to clients last month. The Basel Committee has set the standard for 2018. The ratio was 2 percent after Deutsche Bank sold shares to raise capital in April, he said.
Jain’s decision to increase the amount of cash Deutsche Bank sets aside for legal expenses to 3 billion euros at the end of June from 2.4 billion euros at the end of March meant higher investment banking revenue failed to buoy earnings.
“We expect settlements to accelerate in coming quarters,” Jain said on the conference call with analysts today without providing further details.
As well as being a subject of probes into manipulation of interbank borrowing rates, or Libor, Deutsche Bank is a defendant in civil suits as an issuer or underwriter of U.S. residential mortgage-backed securities. In December, about 500 police and investigators raided its headquarters over tax evasion in carbon markets. It denies any wrongdoing. A Milan judge convicted the bank and three other firms that month of fraud in the sale of derivatives to hedge the city’s interest-rate risk.
“The legal costs were much more than I and others had expected,” Andreas Plaesier, an analyst at M.M. Warburg in Hamburg who recommends investors buy Deutsche Bank shares, said by telephone. “A good operating performance can’t make up for it.”
Jain riled some shareholders in April by asking them to contribute to a 2.96 billion-euro capital increase three months after saying it wouldn’t be in their interests.
The capital increase and efforts to reduce riskier assets boosted the bank’s common equity Tier 1 capital ratio under Basel III rules, which account for risk, to 10 percent at the end of June from 8.8 percent in March.
Deutsche Bank paid more taxes in the quarter. Payments totaled 457 million euros compared with 301 million euros in the same period of last year.
Income from debt trading, Deutsche Bank’s biggest investment banking business, fell 11 percent in the second quarter to 1.9 billion euros. Revenue from underwriting securities increased 67 percent to 622 million euros, helping total revenue at the unit rise 9 percent.
JPMorgan Chase & Co. (JPM:US), Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. (BAC:US) and Morgan Stanley (MS:US) reported a cumulative 24 percent gain in revenue at their investment banks from the year-earlier quarter, excluding own debt valuations, according to data compiled by Bloomberg Industries.
Net interest income after provisions for risky loans dropped 9 percent in the second quarter to 3.18 billion euros, Deutsche Bank said. Commission and fee income rose 8 percent to 3 billion euros. Costs of compensation and benefits dropped 5 percent to 3.2 billion euros, the company said.
In September, Jain announced a plan to reduce annual expenses by 4.5 billion euros by 2015. The firm said it will spend 4 billion euros to achieve those savings. By the end of last year, Jain and his board completed the majority of almost 2,000 job cuts, including more than 800 at the investment-banking unit.
The company started moving 1,500 positions out of New York, London, Hong Kong and Singapore in the first quarter, Chief Operating Officer Henry Ritchotte said in a presentation to investors in Brussels last month. The bank hasn’t specified where the jobs are being moved to.
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