Bank may need to invest just about $10m in additional stress testing technology and external consultants
Deutsche Bank investors took a largely long view on its failure in this year’s US stress tests, with its shares recovering on Friday from a record low hit earlier this week.
Goldman Sachs analysts said the US Federal Reserve’s issues with Deutsche Bank were “long standing” and “not new”, while UBS said the failure was “not a total surprise.” The Fed last year classified Deutsche Bank’s US unit as troubled and Deutsche Bank’s shares had been falling in anticipation of the stress test verdict on Thursday.
Shares in the German bank, which are down 43 per cent this year, were up just over 1 per cent at 9.157 euros at 1023 GMT, above Wednesday’s record low of 8.76 euros.
The test was the second stage in the Fed’s annual health check of banks. Deutsche Bank passed the first phase last week, but was the only lender to fail the second, in another blow to its fragile reputation as it struggles to revive profitability.
The Fed, which regularly checks banks’ financial strength, cited “widespread and critical deficiencies” in Deutsche Bank’s capital planning controls.
“It does seems like Deutsche Bank at the moment is the worst student in the class that can’t get anything right,” said Octavio Marenzi, CEO of consultancy Opimas.
Deutsche Bank said in a statement on Thursday it had made significant investments to improve its capital planning capabilities as well as controls and infrastructure at its US subsidiary and would work with regulators to build on these.
The European Central Bank, which oversees Deutsche Bank, and German financial market watchdog BaFin both declined to comment.
Deutsche Bank will now need to obtain the Fed’s permission before making capital payouts to its German parent.
But the overall impact will be limited, Marenzi said. The bank may need to invest just about $10 million in additional stress testing technology and external consultants.
Michael Huenseler, head of credit portfolio management at Assenagon, said the Fed’s assessment could however spook clients in the US just as the bank tries to regain its footing there after announcing deep cuts in its US and Asian operations.
“The US plays a major role for their investment banking revenues and if the US doesn’t deliver the results they are expecting, what else does compensate for this? That is really a concern,” Huenseler said.
Analysts at UBS said that, while expected, the Fed’s results are “an unwelcome outcome as it adds to weak sentiment and we think various stakeholders such as clients/counterparts could raise concerns.” The Fed’s assessment follows months of turmoil at Deutsche, which abruptly reshuffled management in April after three consecutive years of losses. It then began plans to scale back its investment bank to refocus on Europe and its home market.
It has flagged cuts to US bond trading, equities and the business that serves hedge funds.