Among major investment banks, Citigroup Inc. and Goldman Sachs Group have made the biggest strides to deleverage their balance sheets, according to JMP Securities analyst, but Deutsche Bank AG is a "clear laggard" that may be forced to recapitalize.
Leverage is one measure used to examine a company's risk, and too much of it at banks has been cited as the spark that ignited the financial crisis, JMP's Michael Hecht said in a report published Monday. Most banks have acted to reduce debt and build assets in the last year, and to the extent that they succeed or fail, investors can factor in the information to their risk assessments, including any need to recapitalize, the report said.
By the same token, banks building up trading operations and other earnings drivers normally need to expand their balance sheets, which means more leverage, the report said.
Hecht tried to gauge investment banks' leverage by comparing their tangible common equity to their tangible assets, then comparing that ratio to historical averages. Citi's ratio of 18.5 in the third quarter came in lower than its historical average of 27.4. The same was true for Goldman, at 16.4, well under its historical average of 27.3.
But the analyst also found that Deutsche Bank's leverage has grown significantly. Its ratio of tangible common equity to tangible assets was 66.2 in the third quarter, compared to a historical average of 46.3.