Deutsche Bank's Ackerman Forecasts Trouble Ahead

| About: Deutsche Bank (DB)

imageOn Tuesday, we wrote about Deutsche Bank’s (NYSE:DB) earnings release which signaled the bank was protecting itself against further difficulty ahead (A Cautious Tone for Deutsche Bank). The bank worried investors by devoting a great more resources to loan loss provisions than any analysts had expected, a seven-fold increase. The stock is down 13% this week, and it has suffered downgrades from UBS, FBR Capital, and Morgan Stanley. Just a few days later the largest German bank’s CEO Josef Ackermann explained the rationale behind the move.

“The crisis is not over. When one looks at the developments of global economic growth, then it can be expected that starting in the second half of this year we slowly move into the positive territory. But we’re still moving on a low level…

We were disciplined in our considerations about what risks which we should take. If we had played it out to the full extent, we could have earned significantly more.”

Ackermann assessment hinges on rising delinquencies among both consumer and corporate borrowers. Being the CEO of the largest German lender, Ackermann thinks it is prudent to shrink the balance sheet and set more reserves aside for the prospect of any further economic weakness. Clearly, Deutsche Bank could have made more money in the last quarter were they more aggressive, but eurozone unemployment continues to rise and we think cautious behavior should not be ostracized after the financial meltdown we experienced last year.

We are not recommending Deutsche Bank shares at current levels, and the risk averse methods of the bank will impact profitability if economic conditions continue to improve. That does not mean that Ackermann is wrong though, and we have gained respect for his ability to stand in the face of the conventional wisdom that recovery is on the way. We tend to agree with Ackermann that there are still quite a few difficult headwinds for lenders that will put pressure on banks’ balance sheets once again. It seems that Deutsche Bank’s board is okay with taking the more defensive tact as they have recently extended his employment contact through 2013.

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