By Edward Taylor and Arno Schuetze
FRANKFURT (Reuters) - Deutsche Bank plunged to its worst quarterly loss in four years on Thursday after it took nearly $4 billion in charges to try and draw a line under a slew of scandals and boost its balance sheet without asking shareholders for cash.
Shares in Germany's largest lender hit their highest level in nearly a year after it raised its capital levels closer to European peers. But with so much uncertainty surrounding future capital requirements for the industry, a rights issue, which would dilute existing investors, remains a risk, Deutsche said.
"We have been very consistent. We have said we do not believe it is in our shareholders' best interests. We have shown that we are willing to take pain," Co-Chief Executive Anshu Jain told a conference call when asked about a possible rights issue.
"This said, clearly, it is a very uncertain world. There is a plan B. We will not rule out any option that is in the best interest of Deutsche Bank."
With patchy introduction of Basel III global bank capital rules, regulators are increasingly pursuing tougher national regimes to rein in lenders, prompting fears of a regulatory arms race.
"We saw regulators in the world come together in 2009. I am concerned this regulatory cohesion will not last," said Jain.
Deutsche Bank cut its risk-weighted asset (RWA) base by 55 billion euros in the fourth quarter, helping to raise its core tier one capital ratio under Basel III rules to 8 percent at the end of 2012 from under 6 percent at the end of 2011.
RWAs are a bank's assets, usually loans, adjusted for the likelihood of non-payment.
Changes to Deutsche's internal risk models helped drive the reduction in RWA, which analysts said could come back to haunt the bank if regulators harmonize the way banks estimate the riskiness of their loan books.
"They might apply some minimum floor for RWAs, which would cost Deutsche Bank a lot ... Their internal models could have to be thrown out the window," said Espirito Santo analyst Andrew Lim, who has a "sell" recommendation on Deutsche Bank shares.
Lim believes the bank needs between 15 billion and 20 billion euros of additional capital and warned the European Central Bank (ECB), which takes over supervision of banks across the region next year, might take a harder line on capital than the German regulator, BaFin.
"I think they need that amount ... they might not be made to raise it, they haven't been made to raise it by BaFin. The ECB might take a much more stern stance and force them to raise equity or reduce their balance sheet," he added.
Deutsche Bank's finance chief Stefan Krause however said the bank felt comfortable with the way its measured risky assets.
TAKING THE PAIN
The bank posted a fourth-quarter pretax loss of 2.6 billion euros ($3.5 billion) partly due to a 1-billion-euro hit to cover legal risks, including its potential exposure to an industry-wide scandal involving the fixing of benchmark interest rates.
It also announced a 1.9-billion-euro impairment charge on underperforming assets, shifting them to a "non-core" division for potential run down or sale.
Deutsche Bank shares were up 2.3 percent to 38 euros at 9:20 a.m. ET, their highest since March. The stock has lagged rivals over the past 12 months, rising 17 percent compared with a 21 percent increase for the benchmark Stoxx Europe 600 Banks Index.
Deutsche Bank is currently embroiled in a number of legal disputes, including a decade-long legal battle over the 2002 bankruptcy of Germany's Kirch Media Group, a carbon trading scandal, as well as being one of a dozen banks under official investigation for allegedly rigging global benchmark interest rates, including the London Interbank Offered Rate (Libor).
The bank said it was too early to say if allegations its staff were involved in rigging Libor would be settled this year.
Switzerland's UBS and Britain's Barclays paid a total of nearly $2 billion to settle such allegations.
Krause played down the legal problems, saying peers had similar issues. "The tail of legal liabilities is fairly typical," he told analysts. "The regulatory and litigation environment remains challenging."
Deutsche Bank has increased its litigation reserves to 1.8 billion euros from 800 million euros, some of which is related to the Libor probe.
In addition, 2 billion euros of contingent liabilities remain, the bank said, referring to possible losses over and above existing legal provisions.
Last year the bank said it would create a new "non-core" division to house 125 billion euros worth of assets that either eat up too much capital or fail to throw off sufficient profits.
The bulk of the impairment charges booked for these assets - 1.2 billion euros - was attributable to the bank's corporate banking and securities unit (CB&S), its main investment banking arm and traditionally its strongest performer.
CB&S posted a quarterly pretax loss of 548 million euros.
The bank had guided investors in December to weaker fourth-quarter earnings. Analysts were, however, unsure how much of the pain the bank would take in the quarter, so quarterly forecasts diverged widely from a net loss of 538 million euros to a net profit of 162 million euros.
The bank's net loss for the quarter was 2.2 billion euros.
Since the end of 2011, the bank has reduced headcount by 2,777, the results showed. it is in the midst of a restructuring drive designed to achieve annual cost savings of 4.5 billion euros by 2015.
(Additional reporting by Jonathan Gould in Frankfurt and Laura Noonan in London; Writing by Carmel Crimmins; Editing by Victoria Bryan and Mark Potter)
(c) Copyright Thomson Reuters 2013. Check for restrictions at: http://about.reuters.com/fulllegal.asp