Deutsche Bank Stress Test CET1 Ratio Hit About 8 Percent

(Bloomberg) -- Deutsche Bank AG’s key measure of financial strength will be at around 8 percent in the toughest scenario outlined in Europe’s latest stress test, a better result than in 2016, according to people with knowledge of the matter.

The German lender’s common equity tier 1 ratio in this year’s stress test would compare with 7.8 percent in the previous round and with its 14 percent CET1 ratio at the end of 2017, which was used as the starting point for the current exercise.

The drop at Deutsche Bank is in line with an average decline of 600 basis points for the eight German banks included in the test, two other people said. All asked not to be identified discussing the private information.

Deutsche Bank declined to comment.

The European Banking Authority will publish official results for the stress test later on Friday. While banks can’t officially fail the test, supervisors typically use the results to calculate capital demands on lenders. In addition, investors may raise questions about a bank’s capital strength if the CET1 ratio is perceived as weak.

The European Union legal minimum for CET1 is 4.5 percent of risk-weighted assets, though supervisors generally set higher requirements on a bank-specific basis. The European Banking Authority’s test looked at 48 lenders in scenarios such as years of economic contraction, a rise in government bond yields and potential economic fallout from Britain’s withdrawal from the EU.

The stress test involved a particularly harsh scenario for German banks. One example assumed a drop in the country’s gross domestic product of 3.3 percent between 2018 and 2020, compared with a decline of 2.7 percent for the EU as a whole.

Deutsche Bank Chief Financial Officer James von Moltke announced last week that the bank has started redeploying some of its cash reserves into higher yielding assets as it has gained more clarity on the impact that several current regulatory assessments will have on its CET1 ratio.

©2018 Bloomberg L.P.