Counterparties: Deutsche’s hope and “uncomfortable change”
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Today, Europeâ€™s biggest bank posted a $3 billion net loss, but it insists itâ€™s embarking on “deliberate”, “uncomfortable change”. Deutsche Bankâ€™s revenue up was up 14%, and the bankâ€™s losses came from a â‚¬1.9 billion writedown on assets and â‚¬1 billion put aside for litigation (read: likely Libor scandal-related) costs.
But analysts, including KBWâ€™s Andrew Stimpson, agreed that â€śthe big thing is the capitalâ€ť that the bank is amassing to comply with future regulations. DBâ€™s Tier 1 capital ratio — the amount of money its regulators require it to hold against losses — jumped to 8%, higher than its target of 7.2%, and the stock market promptly loved it.
TheÂ WSJ,Â Reuters and Bloomberg each suggest much of this capital boost was due to the bank tweaking its internal risk models — changing the way it values assets rather than, say, selling them off. ToÂ David Weidner, this kind of dial-fiddling means the bank could be reaching â€śthe limits of financial engineeringâ€ť.Â Dominic Elliott argued earlier this month that DB has a long way to go on its capital: â€śinvestors want big universal banks with sizable exposure to capital markets to be at around 10 percent as soon as practicable.â€ť Â (For the uber-wonky, here are the Basel guidelines for tweaking this sort of formula).
DB has been very busy lately thinking about the future: itâ€™s shrinking and â€śundergoing the most radical surgery of its global peersâ€ť; itâ€™s being asked toÂ simulate its own breakup while possibly facing aÂ version of the Volcker Rule; and its own executives have been actively pushing the industryâ€™s most aggressive messaging campaign. In the bankâ€™s earnings release, co-CEO Anshu Jain said he wants to â€śplace Deutsche Bank at the forefront of cultural change,â€ť a process that will take â€śyears not monthsâ€ť. (Hence, the bank calling this â€śStrategy 2015+â€ť, which will, likely, mean fewer employees getting paid less).
DBâ€™s main problem, LexÂ writes, is more mundane: it simply needs to stop paying its employees more than its competitors. On that, Deutsche says itâ€™s making progress. The bank deferred more compensation for senior execs, and it has eliminated multi-year bonus guarantees. Sarah Butcher finds a murkier picture — pay per employee in the investment and corporate banking division is actually up, despite variable compensation (aka bonuses), as a percentage of revenue, falling by 60% since 2006. — Ryan McCarthy
On to todayâ€™s links: