Deutsche Bank to tighten balance sheet by 20%

Deutsche Bank intends to shrink its vast balance sheet by as much as a fifth in order to comply with incoming stricter rules for banks financial policies. Deutsche is expected to announce to investors that it aims to achieve a minimum of 3% ratio of overall equity to loans by the end of 2015, as it was enforced by European regulator, people briefed on the plans said.

The German bank is also considering issuing at least 6 billion euros in hybrid equity capital, once the German banking regulator has clarified which instruments will be recognized under a new global capital regime for banks. Rival bankers and analysts have voiced concerns that Deutsche Bank has operated at much lower capital levels throughout the financial crisis than some others, complaints that have intensified as European competitors from UBS to BNP Paribas have drastically cut back their balance sheets.

The German lender’s estimated ratio of equity to assets stood at 2.1% at the end of the first quarter, the second-lowest of 18 banks ranked by Morgan Stanley analysts. European regulation based on the Basel III global rule book demands a minimum ratio of 3% to be achieved only in five years’ time. But the topic has risen on investors’ agenda after UK, Swiss and US regulators have drawn up plans for either stricter timetables or higher ratios.

Deutsche Bank aims cut its balance sheet by up to 20% to about 1 trillion euros in the next two and a half years. The bank believes the measures it is planning would have a very small, or no impact on earnings. Its strategy to achieve the minimum ratio includes the application of new regulatory rules for the accounting of derivatives, reducing its vast cash pile of 240 billion euros and shrinking the 90 billion euros of assets in its so-called non-core unit, including mostly non-performing loans.

“Our expectation is that most European banks will aim to meet requirements by 2015,” Kinner Lakhani, analyst at Citigroup, wrote in a note to clients, cited by Financial Times.

However, the focus on leverage ratios has triggered some discontent among bank executives, who warned it would motivate lenders to concentrate on riskier products and reduce cash holdings.
“A leverage ratio is undoubtedly important,” Anshu Jain, Deutsche Bank’s co-chief executive, said at a recent conference. “But [it] has significant flaws that could lead to perverse outcomes.”, he added for Financial Times.