Deutsche Bank Looks Richer Without Marks
Deutsche Bank Looks Richer Without Marks
>>>It sounds like lots of banks were able to paint a rosy Q1, a feat tough to repeat.<<
By SIMON NIXON
Deutsche Bank has emerged an unlikely winner from the credit crunch. How one of the world's most leveraged banks with big toxic-asset exposures has avoided raising capital is somewhat of a mystery. But the good news, topped by a strong first quarter, is now the share price.
Deutsche made net profit of â¬1.2 billion ($1.6 billion), compared with a huge loss in the previous quarter, thanks to a sales and trading recovery. Yet the bank remains exposed to toxic assets and monoline insurers, despite another â¬841 million ($1.1 billion) first-quarter write-down. It also has huge amounts of commercial-mortgage-backed securities and leveraged loans, which Deutsche has avoided writing down by reclassifying them under accounting-rule changes.
If these had been marked to market, the bank would almost certainly have had to raise capital. Instead, Deutsche can claim a core Tier 1 capital ratio of 7.1% and a leverage ratio of 25 times tangible common equity, not wildly out of line with rivals. Now that Deutsche has shown it can generate capital internally, an imminent cash call is unlikely.
Even so, Deutsche will pay a price for not writing down its exposures. Aside from uncertainty over the scale of eventual losses, the risk is they will drag on earnings as they emerge.
That matters because booming first-quarter conditions mightn't be sustainable. Margins have expanded and key competitors have gone, but April is proving quieter. Deutsche shares trade at 1.1 times forecast 2009 book value, a level requiring Deutsche to continue matching the first quarter's 14.7% return on equity. That could be a tall order.
Deutsche Bank Looks Richer Without Marks
>>>It sounds like lots of banks were able to paint a rosy Q1, a feat tough to repeat.<<
By SIMON NIXON
Deutsche Bank has emerged an unlikely winner from the credit crunch. How one of the world's most leveraged banks with big toxic-asset exposures has avoided raising capital is somewhat of a mystery. But the good news, topped by a strong first quarter, is now the share price.
Deutsche made net profit of â¬1.2 billion ($1.6 billion), compared with a huge loss in the previous quarter, thanks to a sales and trading recovery. Yet the bank remains exposed to toxic assets and monoline insurers, despite another â¬841 million ($1.1 billion) first-quarter write-down. It also has huge amounts of commercial-mortgage-backed securities and leveraged loans, which Deutsche has avoided writing down by reclassifying them under accounting-rule changes.
If these had been marked to market, the bank would almost certainly have had to raise capital. Instead, Deutsche can claim a core Tier 1 capital ratio of 7.1% and a leverage ratio of 25 times tangible common equity, not wildly out of line with rivals. Now that Deutsche has shown it can generate capital internally, an imminent cash call is unlikely.
Even so, Deutsche will pay a price for not writing down its exposures. Aside from uncertainty over the scale of eventual losses, the risk is they will drag on earnings as they emerge.
That matters because booming first-quarter conditions mightn't be sustainable. Margins have expanded and key competitors have gone, but April is proving quieter. Deutsche shares trade at 1.1 times forecast 2009 book value, a level requiring Deutsche to continue matching the first quarter's 14.7% return on equity. That could be a tall order.