* Deutsche core tier one 8 percent vs target 7.2 percent
* Analysts question Deutsche's Risk Weighed Assets model
* Finance chief defends bank's methodology as rigorous
* Attributes improvement to granular focus on assets' risk
By Laura Noonan
LONDON, Jan 31 (Reuters) - The sharp improvement in DeutscheBank's capital ratio has revived debate about therole banks' own risk models play in deciding whether or not theyhave sufficient reserves.
Germany's largest lender, one of Europe's most weaklycapitalised major banks, beat expectations on Thursday when itreported an 8 percent core tier one capital ratio for the end of2012, helping to drive its share price close to one-year highs.
This compared to a target of 7.2 percent and 8.5 percent bythe end of this quarter.
But on a conference call after the results, analystsquestioned the way Deutsche had arrived at the 8 percent figure,in particular, they way the model changes helped them cut theirRisk Weighed Assets (RWA) by 55 billion euros ($74.7 billion) inthe fourth quarter.
"They're already one of the most aggressive users ofinternal models. For them to do that again (in the fourthquarter) really stretches credibility," said Andrew Lim, aLondon-based analyst at Espirito Santo, which has a "sell"recommendation on the German bank.
Deutsche's finance chief Stefan Krause defended the bank'smethodology on the analyst call and said the bank's models wouldhold up amid moves to harmonize RWAs globally.
He said he was very comfortable with how the bank wouldstack up against its peers when international regulators examineapproaches to risk weighting.
"They (the results) will prove that these accusations toDeutsche Bank's reliance on modelling might not be as true, andthat maybe some of our other competitors are more exposed tothis than we are," he said.
Banks, with the approval of regulators, can use their ownmodels to assess how risky their assets are and assign a 'riskweighting' to various categories of loans and bonds.
These RWAs are used as a yardstick for the bank's capital,since capital demands are capital as a percentage of RWAs.
Krause said banks got lower risk charges by taking a more"granular" look at their books.
"Don't forget also that it takes a long time and acontinuous proof between standardized and our individual modelsto make sure that our modelling of risk corresponds," he toldanalysts.
Analysts at Credit Suisse estimated that 41 billion euros ofthe fourth-quarter drop in Deutsche's RWAs was due to changes inDeutsche's modelling and warned that some of those cuts may haveto be reversed if regulators harmonise how banks assess theirown riskiness.
Banks have been cutting RWAs in a bid to hit Basel IIIcapital targets, which are being phased in from 2014, withratings agency telling Reuters last week that commercial banks'RWAs had fallen from 65 percent of total assets in 2007 to 35percent by June 2012.
FLAK
At Deutsche, after the latest round of model changes, riskweighted assets have fallen to about 19 percent of the bank'stotal assets, as measured under the incoming Basel III system.
Under the old Basel 2.5 system, they came in at just under18 percent.
That compares with Royal Bank of Scotland, whoseRWAs equalled 35 percent of the bank's total assets inSeptember, and Barclay's, whose RWAs equalled 24percent at the same point, based on Basel 2.5.
At Credit Suisse, RWAs were about 23 percent oftotal assets by September. At BNP Paribas', the figurecame in at 29 percent at the half year point.
Although Switzerland's UBS had RWAs equal to just15 percent of total assets in September it is Deutsche whichappears to be taking the heaviest flak.
This partly reflects the candid disclosure Deutsche has madeon its RWAs.
Institutions aren't required to disclose what drives changesin risk weighted assets, but Deutsche has done so anyway,telling investors how much of the reduction was due to assetsales and how much of it was due to model changes.
"The bottom line is we can only go on what they have givenus," said Chris Wheeler, analyst at Mediobanca.
Barclays (BARC)
