Deutsche Bank pledged to cut risky assets from its balance sheet in response to regulatory concerns, as quarterly profit missed expectations, hit by a 630 million euro (HK$6.49 billion) hike in litigation reserves.
Deutsche Bank posted a second quarter pre-tax profit of 792 million euros, well below the 1.3 billion euros forecast by analysts in a Reuters poll. Shares were indicated 2.5 per cent lower in premarket trading.
The flagship lender’s quarterly earnings stands in sharp contrast to peers. So far this reporting season, investment banking rivals like Morgan Stanley, Goldman Sachs, JPMorgan Chase, and Bank of America have beat analysts’ profit expectations, thanks largely to strength in trading and underwriting.
The bank identified 250 billion euros worth of assets to cut in an effort to meet new bank safety rules. “We are committed to further reducing balance sheet in a manner that enables us to meet requirements on leverage ratio,” co-chief executive Juergen Fitschen said in a statement.
Deutsche said it will seek to achieve a leverage ratio of 3 per cent under more stringent bank safety rules after regulators questioned the bank’s ability to absorb financial shocks in a crisis.
Although Germany’s flagship lender raised capital in April, one of the top US regulators, Thomas Hoenig, Federal Deposit Insurance Corp Vice Chairman, last month called Deutsche Bank “horribly undercapitalised.”
Hoenig said that although Deutsche Bank looks well capitalised when measured by Basel III global capital rules it looked weak when you look at the bank’s leverage ratio.
To gauge a bank’s ability to withstand a crisis, the leverage ratio - which compares a bank’s shareholder equity to its total assets without using risk weightings - is more appropriate, Hoenig said.