If there was ever a time for Deutsche Bank to beat analysts’ forecasts and post a profit, that time was now.
The German lender posted a net income of €259 million ($279 million), beating analysts’ forecasts of a loss against backdrop of weakening financial clout.
In the past few months, the bank has seen its share price plummet to close to 30-year lows, and faced questions over whether it needs a bailout, because of unresolved legal issues in the US.
Last month reports surfaced that the US Department of Justice was looking to impose a $14 billion fine for mortgage-backed security misselling in the run-up to the financial crisis.The fine is bigger than the bank’s market value, leading to fears the bank would be sunk.
The lender’s fall has concerned regulators.
According to a report in the Financial Times, the Bank of England has sought information from UK lenders about their direct exposure to Deutsche Bank to get a a sense of how much damage the German bank’s failure could potentially wreak on the financial system.
The FT said that the central bank’s Prudential Regulation Authority sent out its request “in recent weeks,” and also concerned exposures to Italian banks.
It’s the kind of thing supervisors do when they’re worried about a particular risk to financial stability, and happened during the European sovereign debt crisis and the rout in commodities last year.
The UK central bank is not the only global regulator that is concerned about Deutsche.
Last month the US Federal Deposit Insurance Corporation painted Deutsche Bank as the riskiest bank in the world. The bank has a leverage ratio of 2.68% according to the regulator’s calculations, which is a measure of a bank’s financial sustainability, and shows how much equity capital a lender has against assets such as loans.
The US calculation includes the amount of derivatives banks have on their books. A higher percentage suggests a bank is in a better position to weather losses and defaults.
On average, systemically important banks had a leverage ratio of 5.6% — or more than double that of Deutsche Bank.
So, by this measure, the Bank of England’s concern is justified.
But, while Deutsche Bank ranks lower for its leverage ratio, the banks Tier 1 Capital ratio stands at 14%, which is higher than the US banks average of 13.55% and that of Wells Fargo at 12.50%.
Also, the bank’s third quarter results shows signs that the firm is on the mend. Or at least that Cryan’s restructuring is beginning to have a positive effect.
The solid third quarter performance comes with a boost from increased trading revenues, which was up 10% to €2.6 billion led by the debt and currencies business. Analysts surveyed by Bloomberg News forecast a loss of €394 million on average.
And here are shares:
Cryan will need to convince investors that the bank’s structural problems are behind it, and that the recent volatility is more to do with a single, temporary problem — the US fine.
That is a better narrative than that of the bank struggling to find a new business model in a low interest rate, low growth, high capital requirement world.
He alluded to that in his statement on Thursday (emphasis ours):
“We continued to make good progress on restructuring the bank,” Cryan said. “However, in the past several weeks these positive developments were overshadowed by the attention around our negotiations concerning the Residential Mortgage Backed Securities matter in the United States. This had an unsettling effect. The bank is working hard on achieving a resolution of this issue as soon as possible.”
Deutsche Bank also stressed that its revenues were up to €7.5 billion from €7.3 billion in the same period last year, “despite a tough interest rate environment,” showing that its trying the make the best of low interest rate margins.
Where Deutsche Bank used to be a Goliath of the global financial system, it is now David, trying to convince everyone that it can slay its monsters and regain its crown.