Deutsche Bank is facing a dilemma. Capital boost could have a 70% EPS Dilution consequence

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Deutsche Bank is presently trading at a multiple that is at a significant discount its peers despite a 7% structural RoE.
25 Apr 2016 – Seeking Alpha

One can argue that the bank’s depressed valuation is justified given its low profitability. According to the Bloomberg consensus forecast, the market expects DB to post 2016E RoE of 0.275%. 2017E numbers also suggest that the bank is fairly valued, trading in line with valuations of comparable peers.

While 2016-2017 DB’s earnings will be heavily affected by the ongoing reorganization process and possible litigation charges, the bank is heading on the direction towards a “structural” 6-7% RoE – this is what the market expects from Deutsche Bank in 2018. In terms of 2018E numbers, DB looks very cheap:

It would be very naive of us to claim that market overlooks the robust structural profitability of Deutsche Bank. Hence, this valuation framework suggests to us that a capital raising has been already priced in by the market.

The ECB requires Deutsche Bank to maintain a minimum 10.25% CET1 ratio in 2016 as part of the Supervisory Review and Evaluation Process. Additionally, the bank’s G-SIB buffer is being phased-in to 2% by 2019 from 0.5% in 2016, bringing total CET1 requirements to 10.75% in 2016 and to 12.5% by 2019.

While the current capital adequacy ratios are above the required minimum levels, there are three big negative tail risks, which could force DB to raise new capital:

DB faces significant RWA inflation risks due to new rules for the calculation of minimum capital requirements in banks’ trading books – on January 14th, the Basel Committee on Banking Supervision (BCBS) published its revised capital requirements for market risk.

The final standard, also known as the Fundamental Review of the Trading Book (FRTB), is intended to harmonize the treatment of market risk across national jurisdictions and will generally result in higher global capital requirements.

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