Deposit outflows at Deutsche Bank AG in the first quarter were driven by a normalization from heightened levels during the pandemic rather than market jitters connected to US bank failures and the emergency takeover of Credit Suisse Group AG, according to analysts.

Frankfurt-based Deutsche Bank's deposits declined by nearly 5% to €591.94 billion in the three months to the end of March. Their recent peak was €630.77 billion in the third quarter of 2022, data from S&P Global Market Intelligence shows.

This level of normalization was expected, in part due to more competition on deposit prices, according to Olivier Panis, senior vice president at Moody's Investors Service. Rising interest rates prompt migration from sight deposits to more remunerative products, some of them off-balance sheet, Panis said. Deutsche Bank said it saw clients shift funds to higher-yielding investments.

The fact that outflows were triggered more by structural and anticipated factors than by a confidence issue reflects the bank's "well-diversified and stable deposit base," Panis said.

The spread on Deutsche Bank's credit default swaps — which insure against the default of a company's bonds — widened significantly following Credit Suisse's forced merger with Swiss peer UBS Group AG in March, amid fears about the health of the broader European bank market.

The bank's deposit base has stabilized and is expected to be back above €600 billion by the end of April, CFO James von Moltke told Bloomberg Television in an interview. A Deutsche Bank spokesperson did not offer further comment when contacted by S&P Global Market Intelligence.

In line with the market

A minority of the deposit outflows came toward the end of March, von Moltke said during a recent earnings call with analysts, indicating that most happened before the market upheaval. Deutsche Bank saw clients shift deposits to higher-yielding investment alternatives such as money market funds, so some of the money "didn't leave the bank," the CFO said.

Furthermore, deposit outflows in the quarter were not unique to Deutsche Bank and were "broadly in line with the market," von Moltke said.

Barclays PLC and Standard Chartered PLC, as well as UBS and Credit Suisse, saw deposits drop in the first quarter, while Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA saw deposits increase, Market Intelligence data shows.

Deutsche does not show any increased sensitivity to a weakening economic environment that could trigger further deposit outflows in 2023, Christian van Beek, a director in Scope Ratings' financial institutions team and lead bank analyst for Germany, told Market Intelligence. The level of clients moving to other banks with higher deposit rates currently remains very low, van Beek said.

Restructuring payoff

Deutsche Bank reported solid first-quarter results, with revenues and net profit beating expectations. It has also started discussions with supervisors about the potential resumption of share buybacks in the second half.

The solid results reflect the success of Deutsche Bank's three-year restructuring, and by extension support its reputation, van Beek said.

Its liquidity coverage ratio (LCR) — a measure of the share of highly liquid assets held by a bank to ensure its ability to meet short-term obligations — has been increasing in the past few quarters and was 143% at the end of March, well above its 130% target and about €63 billion above regulatory requirements.

"We ended the quarter in as good or better position to withstand a 30-day or a one-year stress environment than we were at year-end based on that strong deposit base, as well as the secured and unsecured funding position we are in," CFO von Moltke said during the earnings call.

And while the bank plans a "gentle decline" in its LCR, it remains "mindful that the risks in the outlook haven't entirely abated," von Moltke said.

Deutsche Bank's liquidity remains a credit strength, especially as its stock of high-quality liquid assets is 70% cash at the central bank and the rest being very liquid securities, Panis at Moody's said.

The bank's granular deposit base also remains a strength, said van Beek. The bank has strong links to its investor base, diversified wholesale funding sources, and 73% of its German deposits are insured, he said.

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