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Deutsche Bank's U.S. Unit Fails Second Round of Stress Test

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Deutsche Bank’s (DB - Free Report) U.S. subsidiary, DB USA Corporation (“DBUSA”) has failed the second level of the Federal Reserve’s stress test on qualitative basis. This is the first time that DBUSA publicly participated in the comprehensive capital analysis and review program.

DBUSA’s capital plan has been rejected by the Fed due to “widespread and critical deficiencies” in its capital planning. Also, the reviewer found weakness in data capabilities and controls that contribute in DBUSA’s capital planning process.

Flaws were discovered in assumptions used in forecasting revenues and losses that might be incurred from its key business lines or in a stressed environment. The regulator also found loopholes in DBUSA’s risk management area that includes model risk management and internal audit.

DBUSA, however, passed the test on quantitative basis. The Fed concluded that even in a severely adverse economic scenario, DBUSA’s Common Equity Tier 1 capital would remain above the minimum requirement of 4.5% and would not fall below 12.2% over the nine-quarter planning horizon. The regulator also found that DBUSA’s Tier 1 Leverage Ratio would remain well above the regulatory minimum of 4% and would not fall below 5.7%.

As Deutsche Bank has been added to the list of troubled banks, the market had been expecting that it might fail this year’s stress test. However, the stock gained 1.4% on the NYSE in the last day’s trading session, reflecting investors’ positive reaction to the Germany-based lender’s promise to improve capital planning capabilities.

In its press release, Deutsche Bank said, “DB USA Corporation has made significant investments to improve its capital planning capabilities as well as controls and infrastructure. DBUSA continues to make progress across a range of programs and will continue to build on these efforts and to engage constructively with regulators to meet both internal and regulatory expectations.”

Among other foreign banks, units of Credit Suisse (CS - Free Report) , Royal Bank of Canada (RY - Free Report) , UBS Group AG (UBS - Free Report) and Barclays also faced the qualitative test for the first time, each passing with flying colors.

Concerns over persistent pressure on revenues due to low interest rates in domestic economy along with involvement in several legal issues have resulted in Deutsche Bank losing 44.2% on the NYSE so far this year compared with 11.8% decline of the industry.

Deutsche Bank currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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