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Opinion

Sideways: Banks get to mark their own balance sheet homework

Bank balance sheets are ballooning and regulators are just fine with that.

Deutsche Bank became the latest firm to warn that it will miss capital targets due to provisions and an expanded balance sheet, in a pre-announcement of its first-quarter earnings on Sunday April 26.

The big surprise in the release was that Deutsche will actually turn a profit for the first quarter. Revenue will be a higher than expected €6.4 billion and pre-tax profit €206 million – when many analysts had expected a loss of at least that amount.

Christian Sewing cartoon 300 

Christian Sewing leads a management team at Deutsche Bank with more credibility than recent incumbents

Deutsche said that its capital may fall “modestly and temporarily” below its common equity ratio target of at least 12.5%, adding: “this revised outlook acknowledges that credit extension to support clients at this time could increase risk weighted assets for several quarters”.

Before the coronavirus crisis hit markets, the RWAs of banks with big trading operations were closely monitored by investors. Steps to cut RWAs – or at least to mitigate growth caused by market movements that affect derivative valuations – were detailed by bank executives on earnings calls and tested for plausibility by analysts.

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