Deutsche Bank walks bad loan tightrope
Deutsche Bank’s Josef Ackermann has bet that income from investment banking will more than cover bad debts buried in his balance sheet.
Ackermann is as usual putting a brave face on things, but looking at the hefty charges Deutsche is taking to provision against credit losses, it’s going to be a close call.
At the height of the financial crisis, Deutsche shifted assets from its trading to its banking book, thus avoiding mark-to-market write-downs and the need to raise more capital.
But dodgy loans catch up with you even if you hold to maturity — the losses just take longer to work their way through the pipe as loans become impaired.
Like Barclays in the UK, Deutsche’s sleight of hand may have helped it wriggle out of needing government help. But the Q2 charges have understandably rattled investors, with its shares down some 9 percent on Tuesday.
The big fear is that these charges are only the beginning and there are other skeletons in Deutsche’s cupboard.
But even if there is more bad news to come — and Ackermann is not overly optimistic in his outlook — the question is whether Deutsche can earn its way out. At first glance, it has successfully done this in the second quarter, beating estimates with a net profit of 1.1 billion euros ($1.57 billion) — helped by a lower tax bill — despite charges of 1.4 billion euros.
There are a few serious caveats other than the rise in bad debt provisions. Deutsche’s profit before tax was actually lower than some estimates, as were the revenue figures for some businesses including investment banking. Costs rose 9 percent.
Given that conditions for sales and trading and other investment banking activities could not get much better than they were in Q2, Deutsche is going to be closely watched.
Deutsche can’t do much more about its previous lending decisions. By focusing on avoiding past mistakes and growing its profits it might still squeeze through with no need to raise new capital, a move Ackermann has staked his reputation on doing without.
Deutsche has done well to bolster its capital ratios and cut risk weighted assets. But on the basis of these results, it’s going to be tight.