Deutsche s only Q4 success

An unexpected improvement in the health of Deutsche Bank’s balance sheet is just as important a focus of its quarterly report as the latest profit disappointment.

After all, a fourth quarter net loss that is €300m deeper in the red than analysts’ forecasts is more a surprise of degree than extent. Deutsche’s business conditions during the quarter have been volatile and uncertain enough for a greater magnitude of value destruction than even that.

An 80 basis point improvement in regulatory capital (Common Equity Tier One, or CETI), to 11.9% of Deutsche’s risk weighted assets, nearer to the average core capital at close continental peers, would ordinarily not be sniffed at, because it reduces the need for a dilutive capital hike. But investors clearly believe DB’s ability to grow income in the longer-term has been set back further than expected by its horrendous year, including a $7.2bn fine that was higher than provisions. Shares were holding on to a near-7% loss at the time of writing.

Major continuing operations, including bond and equity trading, asset management and high street banking, underperformed those of DB’s matched rivals in the states and at its strongest competitors in Europe.

All told, we’re still sceptical of Deutsche’s apparent share price revival since the end of last September. It coincided with signs that the group would avoid paying the highest possible penalty demanded by the U.S. Department of Justice for charges related to sales of toxic mortgage securities. In the end, at $7.2bn, the settlement was about half the initial demand. But it was followed by further penalties including a $603m fine for alleged money laundering violations in Russia. Group provisions that remain well above provisions at banks of a similar size show that value destruction from misconduct is not expected to end anytime soon.

On Thursday, the stock price, like the bank, is again looking peaky.

The rise from all-time lows hit in September is enclosed by a wedge formation which traders typically take as a bearish continuation pattern. Whether or not it turns out to be one, it will be interesting to see whether Thursday’s crack of the lower rising trend turns into a breakdown.

The shares were off their weakest levels of the day at the time of writing, and at €18.06, back within the strict range. A close for the day at such prices, or higher, would go some way to invalidating the bear case for the medium term. A definitive trend breach, or indeed failure to regain support near 38.2% (c. €18.46) of the August 2015-September 2016 slide, would make the flimsy bull case even weaker.

DAILY CHART