Deutsche Bank Gets Bruised in European Stress Test

Deutsche Bank has shown the weakest performance of all 18 banks under our coverage that participated in the 2021 European Central Bank stress test. In the adverse scenario, its common equity Tier 1 ratio dropped from 13.6% at the end of 2020 to 7.4% in 2023. In this scenario, Deutsche Bank would have breached its minimum capital requirements of 10.4% by a hefty 3 percentage points. From a regulatory standpoint, this is still fine. Deutsche would have to prepare a plan on how to rebuild its capital base and would not be allowed to pay any dividends or bonuses until it does. We doubt the market would allow Deutsche to fall this far, however. We expect that Deutsche would raise capital well in advance of any material shortcoming relative to its minimum requirements to avoid a downward spiral hurting its credibility in debt and equity markets, which can be a bank's death knell. We think Deutsche’s performance is also little surprising. The bank is in full restructuring mode, trying to rebuild its income streams and working toward a leaner cost base, both operationally as well as from a capital perspective. As Deutsche is yet to achieve meaningful and sustainable profitability, organic capital generation will remain weak. We maintain our EUR 10.30 fair value estimate and no-moat rating.