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Deutsche (DB) Under ECB Scanner Over Leveraged Transactions
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Troubles have been mounting for Deutsche Bank AG (DB - Free Report) , the latest blow being higher capital demands from its top regulator, The European Central Bank (ECB), if it fails to moderate the company’s leveraged lending to the highly-indebted clients.
As per people knowledgeable about the matter, the ECB has cautioned Deutsche Bank that the company will likely have to hold greater amount of equity to account for risks surrounding its leveraged lending. The regulatory body further noted that the German banking giant might elude the higher capital bar if it amends those risks before the ECB sets 2022 requirements by the end of the ongoing year.
Leveraged finance is part of the investment bank’s debt origination business, which generated revenues worth $300 million in 2020, according to the data compiled by Bloomberg. As per the data, Deutsche Bank holds the seventh position in U.S. leveraged loans, up from last year’s 10th rank. In Europe, the Middle East and Africa, it is graded third after gaining a level. The bank stated that the leveraged finance business was the key driver for a 5% rise in debt origination revenues in first-quarter 2020.
In response to the ECB’s concerns, a spokesperson for Deutsche Bank noted, “We have a strong track record in the business and we follow a prudent risk management approach in line with regulatory requirements.”
According to people familiar with the matter, if the bank’s CEO Christian Sewing does not adhere to the ECB’s caution, the latter could authorize Deutsche Bank to apply a capital add-on individually tied to the leveraged loan unit or impose a higher total capital limit on it to consider for the undertaking risks.
Bottom Line
In recent years, the ECB has become increasingly anxious and privy to the risks coupled with leveraged finance transactions, as stiff competition among banks leads to a relaxation of underwriting standards and piling up leverage.
As for Deutsche Bank, the company’s leveraged loan business has been under regulators’ purview before. Last year, the ECB had warned that Deutsche Bank’s internal risk management framework for highly leveraged deals was “incomplete”, and cautioned the lender to redress the loopholes. The regulator had also “encouraged” Deutsche Bank to withhold high-risk transactions until the ECB authorizes its new risk framework. However, the bank tightened its internal approval process but did not follow the regulator’s request to suspend high-risk transactions until the resolution of the matter.
In fact, in June 2019, the sale of two risky corporate loans underwritten by the bank had led to multimillion-dollar losses in its U.S. investment banking arm after offloading two loans underwritten for private equity clients.
While Deutsche Bank's cost-control efforts and its strategic initiatives will likely support financials in the quarters ahead, the litigation issues due to the bank’s past business misconducts are a key concern. These might lead to higher legal costs in the future, thereby, hurting its bottom line.
Deutsche Bank currently carries a Zacks Rank #2 (Buy). Shares of the company have gained around 19.5% over the last six months, outperforming the 18.4% rally of the industry.
Image Source: Zacks Investment Research
Other Banks Facing Regulator Encounters
Several banks continue to encounter legal probes and have been charged with huge sums of money for business malpractices. This May, Bank of America (BAC - Free Report) agreed to pay a penalty of $75 million in order to settle an excessive fees probe.
Last December, Mr. Cooper Group Inc. (COOP - Free Report) was charged a penalty of $28.6 million in order to settle legal probes with the Consumer Financial Protection Bureau regarding certain improper loan servicing practices committed between 2010 and 2015.
In November 2020, Wall Street major JPMorgan (JPM - Free Report) was penalized with a fine of $250 million for poor risk management and internal controls over the fiduciary business.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 77 billion devices by 2025, creating a $1.3 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 4 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2022.
Image: Bigstock
Deutsche (DB) Under ECB Scanner Over Leveraged Transactions
Troubles have been mounting for Deutsche Bank AG (DB - Free Report) , the latest blow being higher capital demands from its top regulator, The European Central Bank (ECB), if it fails to moderate the company’s leveraged lending to the highly-indebted clients.
As per people knowledgeable about the matter, the ECB has cautioned Deutsche Bank that the company will likely have to hold greater amount of equity to account for risks surrounding its leveraged lending. The regulatory body further noted that the German banking giant might elude the higher capital bar if it amends those risks before the ECB sets 2022 requirements by the end of the ongoing year.
Leveraged finance is part of the investment bank’s debt origination business, which generated revenues worth $300 million in 2020, according to the data compiled by Bloomberg. As per the data, Deutsche Bank holds the seventh position in U.S. leveraged loans, up from last year’s 10th rank. In Europe, the Middle East and Africa, it is graded third after gaining a level. The bank stated that the leveraged finance business was the key driver for a 5% rise in debt origination revenues in first-quarter 2020.
In response to the ECB’s concerns, a spokesperson for Deutsche Bank noted, “We have a strong track record in the business and we follow a prudent risk management approach in line with regulatory requirements.”
According to people familiar with the matter, if the bank’s CEO Christian Sewing does not adhere to the ECB’s caution, the latter could authorize Deutsche Bank to apply a capital add-on individually tied to the leveraged loan unit or impose a higher total capital limit on it to consider for the undertaking risks.
Bottom Line
In recent years, the ECB has become increasingly anxious and privy to the risks coupled with leveraged finance transactions, as stiff competition among banks leads to a relaxation of underwriting standards and piling up leverage.
As for Deutsche Bank, the company’s leveraged loan business has been under regulators’ purview before. Last year, the ECB had warned that Deutsche Bank’s internal risk management framework for highly leveraged deals was “incomplete”, and cautioned the lender to redress the loopholes.
The regulator had also “encouraged” Deutsche Bank to withhold high-risk transactions until the ECB authorizes its new risk framework. However, the bank tightened its internal approval process but did not follow the regulator’s request to suspend high-risk transactions until the resolution of the matter.
In fact, in June 2019, the sale of two risky corporate loans underwritten by the bank had led to multimillion-dollar losses in its U.S. investment banking arm after offloading two loans underwritten for private equity clients.
While Deutsche Bank's cost-control efforts and its strategic initiatives will likely support financials in the quarters ahead, the litigation issues due to the bank’s past business misconducts are a key concern. These might lead to higher legal costs in the future, thereby, hurting its bottom line.
Deutsche Bank currently carries a Zacks Rank #2 (Buy). Shares of the company have gained around 19.5% over the last six months, outperforming the 18.4% rally of the industry.
Other Banks Facing Regulator Encounters
Several banks continue to encounter legal probes and have been charged with huge sums of money for business malpractices. This May, Bank of America (BAC - Free Report) agreed to pay a penalty of $75 million in order to settle an excessive fees probe.
Last December, Mr. Cooper Group Inc. (COOP - Free Report) was charged a penalty of $28.6 million in order to settle legal probes with the Consumer Financial Protection Bureau regarding certain improper loan servicing practices committed between 2010 and 2015.
In November 2020, Wall Street major JPMorgan (JPM - Free Report) was penalized with a fine of $250 million for poor risk management and internal controls over the fiduciary business.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 77 billion devices by 2025, creating a $1.3 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 4 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2022.
Click here for the 4 trades >>