Deutsche Bank investors stuck waiting for an unwanted call

Investors, however, are still left in the dark about whether the bank can afford to pay the US Department of Justice to settle its mortgage probes and reach the higher capital target set for 2019.

It still looks certain to have to raise capital from somewhere, but nothing will happen until this penalty is fixed.

That must be frustrating for all involved and certainly leaves the bank’s stock vulnerable to more panic attacks like the one it suffered this month. Then again, only a fool goes to a cash machine in the middle of negotiating a deal.

In terms of timing, the picture unfortunately got muddier. The bank’s desire to settle “this year” could in fact mean any time up until its annual report is properly filed, which is expected in the middle of next March.

But there were positives. First, Deutsche is cutting operating costs more rapidly than expected, much of which is from lower personnel costs. Bonuses are a big part of the reduction. That could see some investment bankers looking to move, although Deutsche could also simply be deferring more pay into future years.

The other thing Deutsche did well was prune some nasties from its balance sheet more quickly than expected. There was a big reduction in its non-core unit, or bad bank, and the assets cut were hard-to-shift derivatives positions rather than simpler assets like the New Jersey port sale that is set to complete this year.

These cuts and some trimming in its sales and trading arm did more to lift Deutsche’s capital ratio this quarter than anything else. Add in the sales of a Chinese bank stake and a UK life-insurance business—both agreed but pending—and Deutsche Bank’s capital ratio is up to about 11.7%. That is well on the way to the target of 12.5% in 2019.

The trouble is it won’t be at this level by the end of the year, especially if the mortgage settlement is actually agreed.

Estimates for this are mostly around the $ 5 billion mark, though any analyst will tell you they really don’t know. Even without that, the bank is expected to record a full-year loss—though perhaps only a small one—which also will consume capital.

Then, in the next two years, the bank has to cope with expected changes to global capital rules that will increase its risk-weighted assets by €80 billion to €100 billion ($ 87 billion to $ 109 billion)—adding more than 20% to its capital needs. And it must settle another probe related to its Russian business, estimates for which are even less certain than for the mortgage probe: anything between a few hundred million euros and a few billion. Plus there is a likely loss coming on the sale of its retail unit.

Deutsche Bank’s business still doesn’t look like it can generate enough profits to foot all these bills and get to where its balance sheet needs to be without raising capital.

Investors have several more tense months to wait for a call they probably don’t even want to take.

Write to Paul J. Davies at paul.davies@wsj.com

This article was first published by The Wall Street Journal

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