Deutsche Bank Gambles on a Big Dividend
NEW YORK ( TheStreet) -- Investors are breathing a sigh of relief after Deutsche Bank (DB) , Europe's largest bank by assets, rebuilt its capital position even as it suffered a $3 billion fourth-quarter loss.
The earnings indicate that, in the near term, Deutsche Bank's profit will be hit by restructuring efforts such as a planned 90 billion euro reduction in risky assets, layoffs and an exit from some capital-intensive businesses. They also show strong initial results by the bank's co-heads, Jürgen Fitschen and Anshu Jain, in achieving restructuring and recapitalization targets, after their June 2012 appointments.
Still, Deutsche Bank's capital position -- and the quality of its assets -- remains the biggest question hanging over the European banking conglomerate, according to analysts. The Frankfurt-based bank reached a Basel 3 tier 1 capital ratio of 8%.
So why is the bank paying out a relatively large dividend compared with U.S. peers such as Bank of America (BAC) and Citigroup(C) , which may appeal to the Federal Reserve to improve on the 1-cent quarterly payouts they've made since repaying government bailout funds?
Consider that Deutsche Bank's 75-cent dividend for 2012 -- and a similar forecast for 2013 -- is roughly equal to the bank's annual profit for the year, after the fourth-quarter loss.
In 2012, Deutsche Bank earned roughly $1 billion in profit and will pay out about the same amount in cash dividends.
In contrast, Citigroup, which is in a similar position of disposing legacy assets and building capital to meet stricter rules, paid out roughly $120 million in 2012 dividends on $7.5 billion in earnings.
Bank of America, which had multiple quarters ruined by legal settlements and asset writedowns in 2012, paid out just over $400 million in cash dividends on net income in excess of $4 billion.
The U.S. lenders' earnings relative to dividend payouts far exceed those of Deutsche Bank, as do their capital positions. Currently, Citigroup's Basel 3 tier 1 capital ratio stands at 8.7%, while Bank of America's is at 9.25%, based on fourth-quarter results.
At Deutsche Bank's 2012 share-price low of around $30, its annual dividend yield stood at roughly 3%, in line with that of Wells Fargo (WFC) , one of the best capitalized banks in the U.S.
After making better-than-expected progress on its capital in the fourth quarter, Deutsche Bank's Basel 3 tier 1 capital ratio now stands at 8%, with a forecast it will rise to 8.5% by March. The bank said, in an earnings release, that the 2012 rise in its regulatory capital equates to an equity raise of about 8 billion euros.
European competitors such as UBS(UBS) and Barclays(BCS) also pay smaller dividends and hold higher Basel 3 capital ratios. Like Deutsche Bank, UBS and Barclays face earnings pressure from restructuring efforts and legal settlements.