Germans rise in EU stress tests, still among the worst 10 banks in Europe

FRANKFURT (Reuters) – German bank (DBKGn.DE) on Friday among the ten worst banks of recent European stress tests, another sign of weakness in Germany's largest lender.

FILE PHOTO: A man passes by the offices of Deutsche Bank in London (UK) on 5 December 2013. REUTERS / Luke MacGregor / File Photo

Under the hardest "adverse" scenario of the test, Germany's flagship core capital ratio stood at 8.1 percent in 2020, putting it in 40th place out of 48 measured lenders.

In the 2016 test, Deutsche Bank's capital fell to 7.8 percent, tenth place after a health check for 51 lenders.

Some analysts had expected Germany's largest lender to perform poorly after three years of losses.

There was no formal pass / fail mark, but investors are looking at how much core lenders are holding against a 5.5 percent threshold. Highly-supervised health checks across the European Union, carried out by the European Banking Authority (EBA), could lead to laggards receiving capital or deductibles.

"We will not change how we manage the bank after the stress tests," said CFO James von Moltke, adding that the bank's internal stress testing methods differed from those of the EBA test.

"We do not expect the test to impact our SREP values ​​(supervisory review and evaluation process)," he said, referring to the bank's minimum capital requirements set by regulators.

The test result mainly reflected the decline in German profits, but did not show the reduced risk profile of the bank as the assets sold were not taken into account and by Moltke due to the way the test treats strategic liquidity reserves.

"Based on the test design, the results do not fully reflect what management has been doing since the 2016 tests," said von Moltke, adding that the results of the Germans would have been far more favorable if retrospective elements were removed.

A person close to the subject said that the German result adjusted for these factors would have been around 12 percent.

Despite the improvement in Deutsche Bank's equity ratio, analysts had expected that the 2018 results would be roughly at the level of the lender in 2016, analysts said after the EBA had adopted a tougher adverse scenario.

"The result shows that certain measures have been taken to strengthen capital buffers. I see no immediate need for action – such as selling assets, "said Michael Huenseler, credit manager at Assenagon Asset Management. "The result of Deutsche Bank is not shocking and some other banks have developed significantly worse."

British lenders Barclays (BARC.L) and Lloyds (LLOY.L) and Banco BPM of Italy (BAMI.MI) Worst in the EU-wide stress test of banks' resilience to simulated market shocks.

After three years of losses at Deutsche Bank, a failed stress test in the US, several restructuring attempts, a restructuring of corporate governance and a downgrading of ratings, many investors have lost confidence in Germany's largest bank, whose shares have fallen 40 percent year.

In June, the US subsidiary was the only bank that failed a different set of Federal Reserve stress tests due to "widespread and critical deficits" in the bank's capital planning controls.

It was an embarrassment for the Germans who saw the regulators as one of the most important banks in the global financial system.

Last week, the German warned that sales in 2018 compared to the previous year is expected to decline, although for the first time since 2014, a profit is expected.

The then CEO Christian Sewing referred to the strength of the bank's CET 1 ratio of 14 percent and stated that he had "conservatively managed our risk potential".

The rating agency Moody's, which rates the Germans partly because of their modest earnings potential with a negative outlook, last week called the capitalization, the asset quality and the liquidity of the Germans as "solid".

Additional reporting by Andreas Framke; Cut by Edward Taylor and Louise Heavens

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