OREANDA-NEWS. Capital raised by Deutsche Bank (DB) in 2014 will provide a buffer on top of existing reserves for fines and other litigation costs that may emerge this year, says Fitch Ratings. Recurrent earnings will also help absorb any unexpected losses. The USD1.5bn Libor manipulation litigation costs discussed in the press have not yet been confirmed.

The unpredictability of US-related litigation costs clouds the assessment of capital adequacy at global trading and universal banks (GTUBs). The removal of uncertainty once these costs are defined will be positive for the GTUBs. But at present the full extent of DB's litigation costs is unknown, as is the precise earmarking of litigation reserves set aside. If DB is able to absorb most of its litigation liabilities through a combination of existing reserves and recurring earnings, our assessment of its capital will improve.

DB set aside EUR4.6bn, just over half of its combined pre-tax profits for 2014 and 2013, to cover potential litigation costs. At end-2014, the bank's litigation reserves reached EUR3.2bn and contingent litigation liabilities specifically identified by management totalled EUR1.9bn at that date. It is not clear what, if any, portion of the litigation reserves has been earmarked to cover the alleged USD1.5bn Libor fine but existing reserves would appear to provide a reasonable buffer against it. DB also faces a further EUR4.1bn unreserved claims on repurchase of US mortgages.

US litigation costs faced by some other banks have been surprisingly large and it is likely that costs at DB will remain a drag on its future results despite the existing coverage. DB faces legacy litigation and investigation in the areas of foreign exchange trading and US embargoes in addition to the accusations of Libor manipulation.

DB raised EUR8.5bn of equity in mid-2014 and a further EUR4.7bn of additional Tier 1 instruments during the year, providing a notable boost to capital ratios. Fitch's core capital/weighted risks ratio reached 12.2% and the reported leverage ratio was 3.5% at end-2014, in line with GTUB peers.

Keeping capital ratios compatible with peers' is an important factor for DB's 'a' standalone Viability Rating (VR). Most GTUBs' VRs are in the 'a' range, and DB's ability to demonstrate that its capital is sufficient to withstand unknown risks posed by impending litigation is all the more important due to their potential size and the bank's limited ability to build up capital through retained earnings, which its strategic business model review aims to address.