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Monday, January 20, 2014

Is Deutsche Bank Starting To Get Nervous?

Deutsche reported preliminary results for 2013. What stands out is that Deutsche shrank its balance sheet quite significantly over the previous year-end:

* total assets (IFRS) declined 18% to 1.649 BEUR
* total assets (adjusted) declined 11% to 1.080 BEUR
* risk-weighted assets declined 12% to 355 BEUR
* leverage ratio increased from 2,6% to 3,1%

Deutsche has felt the heat for quite some time now: it seems there is hardly a scandal which Deutsche was not involved in. The German Supervisory Agency (BAFIN) leaked last week that they would make a 'special audit' of Deutsche's foreign exchange operations. This in the midst of speculations that Deutsche was involved in manipulating exchange rates. A special audit by BAFIN is a very special thing!

Also, commentators had started (rightfully so!) to pick on Deutsche's leverage. Not capital adequacy according to Basel-2 but, instead, total liabilities to total equity. That leverage had well exceeded 40:1 in 2012, a leverage which is normally reserved for very highly leveraged hedge funds. Remember: a leverage of 49:1 means total assets of 98 and equity of 2 for a balance sheet total of 100. If assets devalue by 2, total equity is wiped out.

Since Deutsche doesn't report 'total equity' in its preliminaries, one can only guess that the above 'leverage ratio' of 3,1% refers to the same leverage which I talk about. It would mean a leverage of 37:1; quite an improvement! (*)

I presume the difference between total assets (IFRS) and total assets (adjusted) is explained mostly by derivatives which IFRS requires to be reported on a gross basis (i. e. no netting-out of matching deals). I would argue that the gross figure is the more important one because if a gross asset is wiped out, it doesn't necessarily mean that a corresponding gross liability is wiped out, too.

Lastly, check the amount of risk-weighted assets (355 BEUR)! I mean, here is a bank which shows total assets (IFRS) of 1.649 BEUR and total assets (adjusted) of 1.080 BEUR. But only 355 BEUR of those assets are considered as carrying risk. And all the rest is risk-free???

A double-digit decline in assets, at a bank the size of Deutsche, can be considered a crash effort. That requires unloading almost 200 BEUR of risk assets and another almost 200 BEUR of risk-free assets. I wonder how much of the unloaded risk assets were Greek bonds sold to the ECB at near-par? (probably none because Deutsche had sold those bonds long before...).

In summary, it is highly doubtful that Deutsche would embark on such a crash effort without either (a) some very significant prodding from the outside (i. e. BAFIN) or (b) some significant worries about the bank's structure on the part of management and the supervisory board or (c) a combination of both.

Deutsche has made a remarkable achievement but it still has a very, very long way to go!

(*) I just read in Handelsblatt that the 3,1% refer to total assets (adjusted). Thus, my above praise of Deutsche was far too soon...

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