Deutsche Bank just reported earnings for its Q2-25 and, of course, everything is awesome! Needless to say, Wall Street expectations have been beaten across the board. As I write, the stock is trading 6% higher on the day. As usual, everyone read the press release, and no one took the time to read the 110-page-long financial report because, otherwise, such a move wouldn’t make any sense. But hey! Everything is awesome nowadays, so be it.
Sadly, I keep the bad habit of reading financial reports, and once again, it does not take long to stumble on one red flag after another. Let’s start with the provision for expected credit losses that the bank made this quarter. Here is what the bank says:
“Provision for credit losses was € 423 million in the second quarter of 2025, or 36 basis points of average loans, down 10% compared to the first quarter of 2025 and 11% from the second quarter of 2024. Provision for non-performing (Stage 3) loans was € 300 million, materially lower than in the previous and prior year quarters, primarily reflecting a model update in line with regulatory requirements.”
Hold on a second here, has the bank just stated that they booked lower provisions for credit losses not because of an improvement in the economic environment, but because of a regulatory gimmick? Yes, that’s correct. So, what exactly is the “model update” Deutsche Bank is referring to?
“In the second quarter of 2025 the Group implemented a model update with regard to the Loss Given Default (LGD) parameter used in the IFRS 9 accounting framework, primarily to align with the corresponding methodologies and models implemented in the solvency framework following regulatory guidelines. This change in estimate led to a net reduction of the credit loss allowance in the amount of € 133 million and impacted all stages. The most pronounced reduction of the credit loss allowance was observed in the Private Bank. In the Corporate Bank and Investment Bank the net impact was primarily in stages 1 and 2 and less pronounced. However, for certain underlying portfolios such as CRE a more pronounced increase in credit loss allowance was observed, which was offset by a reduction of credit loss allowance in other underlying portfolios in these businesses.”
Basically, with this trick, Deutsche Bank reduced its ECL provisions by 10% instead of increasing them by 10% compared to the previous quarter. As a result, the company’s EPS beat analysts’ expectations. So timely, right? I wonder whether, without this adjustment, the bank’s stock price would have been up 6% today, but who cares?
Where Deutsche Bank can barely hide its effort to conceal its losses is in its commercial real estate portfolio, where its own market assessment mentions a sharp decrease in prices and a rise in defaults since 2022, especially in the US. Then how is the bank avoiding making significant provisions for expected credit losses and recognizing significant impairments in its loan values?
“The Group continues to proactively work with borrowers to address upcoming maturities to establish terms for loan amendments and extensions, which in many cases, are classified as forbearance triggering Stage 2 classification under IFRS 9. However, in certain cases, the borrower may be unable to restructure or refinance and therefore is classified as defaulted. This resulted in higher Stage 3 ECLs in 2023, 2024, and the first six months of 2025. Additionally, in the three months ending June 30, 2025, the model update outlined in the IFRS 9 Impairment section led to an increase in Stage 1 and Stage 2 ECLs in the CRE portfolio. Overall, uncertainty remains with respect to future defaults and the timing of a full recovery in the CRE markets.”
In a nutshell, Deutsche Bank is actively helping its CRE borrowers who cannot pay loans and interest anymore to restructure the terms with the bank extending loan repayments into the future without triggering forbearances or defaults. This despite, in its own words, “uncertainty remains with respect to future defaults and the timing of a full recovery in the CRE markets.” Clearly, here the bank is giving more time to CRE borrowers, praying for a miracle that helps the market to recover. However, miracles are not that frequent, but as we know, as long as liquidity is abundant in the system, banks can hold onto their assets and avoid fire-selling them into the market at a value more often than not much lower than what was recorded in the banks’ books. Clearly, the regulator is onboard with this.
What about residential real estate? Especially in Germany, where, as we discussed one year ago already in the article “HOW DO YOU SAY “NINJA MORTGAGE” IN GERMAN? THE BREWING CRISIS NO ONE IS FORESEEING“, the market isn’t far from implosion? Well, on this front Deutsche Bank reported an increase in residential mortgages this quarter. How is it possible? Because the German regulator BaFin loosened banks’ capital requirements in an effort to support a collapsing market, and the bank states it very clearly:
“On April 30, 2025, BaFin announced a reduction in the German sectoral Systematic Risk Buffer for residential mortgages from 2% to 1%, effective May 1, 2025. This will free up funding flexibility for German banks, including Deutsche Bank. The Global Systemically Important Institutions (G-SIB) and Other Systemically Important Institutions (O-SII) buffers are set annually and the bank will receive communication on the updated buffers in the fourth quarter of 2025.”
While the market was in complete turmoil because of Trump’s “liberation day” tariffs, BaFin loosened capital requirements towards residential real estate effective immediately. How convenient, right? Of course, not a move to give banks some oxygen, avoid breaching capital requirements, and fire-sell assets during the mess. I am making some irony here, to be clear.
In October last year, I wrote “CRE CRISIS: HIDDEN LOSSES AND QUESTIONABLE OPTIMISM IN DEUTSCHE BANK’S Q3-24 REPORT“. Fast forward to today, not only has nothing changed, but we have once again the proof of regulators proactively helping the banks to kick the can down the road, hiding their losses in the hope of a miracle that strikes and saves everyone from their misery as we observed few weeks ago in “2025 FED STRESS TEST REVEALS HOW TODAY’S FED IS COMPLICIT IN HIDING BANKS’ PROBLEMS“.
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