(already high) US$547 mn revenue impact.
FED proposal implies >$13 bn capital transfer, intragroup …The FED proposal requires large foreign banking institutions to organize all of their US operations under a single IHC, which in turn has to comply with capital, leverage and liquidity requirements similar to those of US BHCs.
The FED proposal, if implemented as it currently stands, will have substantial implications for Deutsche Bank AG (NYSE:DB) (ETR:DBK)’s capital position. This is for a number of reasons, but two features in their view are the most important:
- DBK Group is highly levered, in a European and a US peer group context (Exhibit 5). The simple leverage ratio (TA/TE) stood at 30x at end 4Q12, roughly 2x the level of the US banks and some 50% higher when compared to the likes of UBS or BNP. That said, DBK’s leverage is on a par with that of CS.
- The geographic distribution of DBK’s capital is uneven within the group. Last reported data for Taunus (4Q12) shows a negative Tier 1 capital position of US$5.6 bn, for example, implying a negative capital position in the US, and a position of substantial capital surplus outside of it (Exhibit 5).
The FED aims to achieve a standalone capitalization of IHCs inline with that of US BHCs, and apply supervision of IHCs both on a risk-based (CT1 ratio) as well as a simple leverage basis. Goldman analyzes the effect on Deutsche Bank’s capitalization (at the group level, on its US operation and on “Deutsche Bank ex US”). Goldman states that their analysis first estimates the hurdle rates, followed by total assets and RWA.
The math is complicated but we provide the main details and a chart from the analysts:
As per Goldman Sachs:
We estimate capital hurdle rates as follows:
- CET1 hurdle rate: 9%. We estimate the applicable minimum capital requirement in the US is 4.5%, to which we add a 2.5% capital conservation buffer, resulting in a 7% CET1 minimum. To this we add a G-SIFI buffer of 2.5%, given DBK’s classification into the top bucket of SIFIs (together with JPM / C / HSBC). This would bring the hurdle rate to 9.5%, but given the comparable US banks currently operate at levels at or around 9%, we have used this as the more appropriate benchmark.
- Minimum Tier 1 leverage ratio: 3%. The FED proposal states that the IHC would also be supervised on a simple leverage basis – here the minimum is 3%.That said the US banks currently report leverage ratios of twice that.
Estimates for total assets:
- Our starting point for estimating total average assets of Taunus is its last reported amount, as of end 2011, when they stood at US$463 bn. This is the asset base, reported by the FED as of end 2011, for the purpose of calculating leverage, which differs from the consolidated end-of-period reported assets.
- Since end 2011, DBK Group has reduced total assets by US$113 bn. We assume that 80% of this reduction relates to Taunus, bringing our estimate for end 2012 assets (for leverage ratio purposes) to US$373 bn (a reduction of US$90 bn).
Estimates for RWAs:
- We assume a B1 to B3 RWA inflation of 30%, which is in line with the RWA increase reported by the US banks. The results are shown in Exhibits 5 and 6 (for the detailed calculations, see Appendix 1).
- The stock of 2012E RWA, calculated in this way, is US$85 bn. On the basis of the above, we derive a capital requirement, under a 9% CET1, of US$7.7 bn. With the starting position of -US$6 bn, the total amount of capital transfer need is US$13 bn. This rises to US$17 bn if the leverage ratio of 3% is applied as an overlay. DBK has levers to reduce low-risk assets and thus the leverage ratio. We therefore see the capital transfer implied by the CT1 ratio as the more relevant one.
