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04 July 2019 by jbchevrel

Deutsche Bank AG (DB) CDS has tightened aggressively since the end of May (c150bp on sub & c70bp on slac) along with the broader CDS market (SubFin31 tightened c70bp & SnrFin31 tightened c35bp), with a beta of c2x. That move happened regardless the fact DB will have to restructure but doesn’t have the capital free to do it. CEO’s restructuring plan for S&T could cost c€5B (FT), to eventually save c€4B (c20k staff was reported). That’s enough to tip it into FY19 loss territory. The option to raise more capital by tapping shareholders is often called off cards, because indeed, DB’s shareholders have already put c€30B into the pot over the past decade, diluting existing ones along the way, and largely participating into the move lower (DB’s share price has lost c85% since the 2010 peak). Another option recently floated to free capital is that DB could cut its CET1% target to 12.5% (from current aim 13% and to be compared with ECB’s minimum of 11.8%). Not super orthodoxic. As of end-2018, CET1 ratio was 14% which is €12B above the ECB’s 2018 SREP letter’s requirement. Not super orthodoxic but can be good to kick the can further down the road. Except that the sacrosanct BCBS has come, under the upcoming brand-new Basel IV framework, with new ways for banks to calculate their capital requirements, in order to make banks more comparable globally. And some analysts expect a potential shock of up to 5% (as in 500bp) to the CET1 ratio new calculation for DB. What’s also not so easy in the ‘cutting non-core/non-profitable’ equation is that some of the businesses where DB targets growth going forward such as take transaction banking and private banking actually rely on non-profitable business such as S&T’s rates and equities. And an article from Bloomberg today added that the cuts won’t be limited to equities and rates. It won’t be limited to the US either (c9k staff as of end-2018 vs target cut of c20k). In parallel, last month, press reported DB considers creating a new non-core unit, that could contain up to c€50B RWAs (FT). That would be 14% of total RWA. DB had created a non-core unit in 2011 and had closed it 2016. Another reason to doubt this is a good option is that given the current nature of the business, the core bank returns are estimated to be low single digits. Thus, the concerns over DB’s ability to generate organic capital would most likely remain. Without a sustainable fix to the biggest German bank, we might arrive at a juncture where the most likely option available is again to tap shareholders, with another selloff in the stock potentially pressuring credit spreads higher. More color around the cuts are expected soon, and then we will get a broader strategy update, along with the Q2 numbers, on July 24. NB: the chart was effectively DB SLAC (senior non-preferred) up to May 13 and came DB snr (preferred) from May 14 onwards.