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Deutsche Bank Discusses Lower Capital Buffer With Regulators

Steven Arons and Nicholas Comfort

(Bloomberg) -- Deutsche Bank AG is sounding out regulators about lowering its capital cushion as a way to help finance its impending restructuring, according to people with knowledge of the matter.

The lender has discussed lowering its common equity tier 1 ratio -- a key measure of financial strength -- with German financial regulator Bafin and the European Central Bank, the people said, asking not to be identified as the information is private. The authorities are generally positive about Chief Executive Officer Christian Sewing’s restructuring plans, they said.

Sewing is putting the finishing touches on what may be the lender’s deepest overhaul in decades including the loss of as many as 20,000 jobs over the coming years, people familiar with the matter have said. The cost could run into the billions of euros, analysts estimate, and the measure could help Sewing pay for the restructuring while avoiding a capital increase that would dilute existing shareholders, other people have said.

Representatives for Deutsche Bank, German markets regulator Bafin and the European Central Bank declined to comment.

The lender’s “current profitability is close to break-even and capital is on track to be near regulatory minimums,” Bank of America analysts led by Andrew Stimpson said in a note on Monday. If Deutsche Bank wants to shrink the investment bank while trying to grow other business lines, it may need to raise 5 billion euros ($5.7 billion) in fresh capital, they said.

Deutsche Bank’s CET1 ratio was 13.7% at the end of the first quarter and it’s current full-year target is to remain above 13%. Some of Deutsche Bank’s European peers such as BNP Paribas SA and Societe Generale SA have CET1 ratios well below 13%. Barclays Plc’s ratio is 13%.

Deutsche Bank is well above its minimum capital ratio of 11.8%, the threshold at which it faces restrictions on dividends and bonuses. But, as a large bank, watchdogs demand that it hold a wider buffer. Anything that moves such a significant bank closer to its minimum tends to be closely coordinated with regulators.

The ECB wants banks to meet its capital demands during restructuring, according to another person with knowledge of the matter. The promise of shedding risk tomorrow doesn’t translate as a lower bar for capital today, the person said. The risks involved in a restructuring mean that supervisors want sufficient capital on hand.

As part of the restructuring, the bank also plans to cut its assets weighted for risk by as much as 50 billion euros, people familiar have said. That reduction over time could lead to a rise in the CET1 ratio, another person said. Handelsblatt previously reported that Deutsche Bank may lower its CET1 ratio to finance the restructuring.

Deutsche Bank shares fell to 6.76 euros Monday in Frankfurt trading as the Euro Stoxx 600 index was up almost 1%.

The revamp is likely to hit Deutsche Bank’s investment-banking division the hardest, particularly its U.S. operations, as well as equities trading and interest rate derivatives, people familiar have said. The bank is planning to cut its global equities headcount by 50%, they have said. The lender also plans to cut about 1,300 positions in the retail and commercial clients division by 2022.

(Updates with details of expected job cuts in final paragraph.)

--With assistance from William Canny.

To contact the reporters on this story: Steven Arons in Frankfurt at sarons@bloomberg.net;Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen

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