Deutsche’s capital ‘hunger march’ resumes
Just 13 months after it last tapped investors for more money, Deutsche Bank has again been forced to admit it does not have enough capital. And the German lender’s €8bn equity fundraising, announced late on Sunday night, puts investors in a difficult position.
On the one hand, fresh capital will go some way toward plugging a hole in Deutsche’s balance sheet that has unnerved shareholders ahead of European Central Bank stress tests this summer.
On the other, the €6.3bn rights issue that will deliver the bulk of the new capital comes at a time when the bank’s share price is already in the doldrums, having fallen nearly 25 per cent since mid-January.
For some investors, this will raise the question of trust in Deutsche Bank’s top management. Last year, Anshu Jain, the co-chief executive, declared that the bank’s “hunger march” for capital was at an end, after Deutsche raised €3bn from investors.
Senior executives have been stressing in recent weeks that Deutsche always had a “Plan B” in mind, involving a fresh equity raising – if its original plan to raise capital “organically” proved insufficient.
Some have also pointed out that Mr Jain and his co-chief executive Jürgen Fitschen have had to deal with new and onerous regulation neither could possibly have predicted when they set out a cost-cutting, capital-strengthening plan in 2012.
Among these regulations are rules from the European Banking Authority on how banks should value illiquid assets. These alone are expected to cause a €2bn capital shortfall for Deutsche. There are also concerns that the ECB could impose stricter accounting standards than Deutsche’s current German regulator.
There are also some investors who have declared themselves happy to endure a dilutive capital raising if it means Deutsche’s capital strength problem could finally be put to bed.
A capital increase would give Deutsche the firepower to compete against US banks in fixed income, currencies and commodity (FICC) trading – an area where most other large banks including Barclays and UBS are embarking on a retrenchment. Senior executives have said the bank is trying to cling on as the only remaining European player in a trading area challenged by a drop in revenues and tighter regulation.
Following news of the fundraising on Sunday, one analyst said: “With a €8bn capital increase they can shut people up ... but they would still have to be tight on their balance sheet and they would not be able to use much for a reinvestment into FICC.”
Meanwhile, the Qatari royal family’s involvement in the capital raising, by taking a €1.75bn stake in Deutsche through its Paramount fund, will make it a sizeable shareholder in another large European bank.
Qatar Holding and Challenger, an investment vehicle of Sheikh Hamad bin Jassim bin Jabr al-Thani, the former prime minister of Qatar, injected £6.1bn into Barclays in 2008, allowing the bank to escape a government bailout. Qatar also owns a more than 5 per cent stake in Credit Suisse, in which it also invested at the height of the financial crisis.
But questions remain as to whether even €8bn in fresh capital will be enough to plug Deutsche’s capital hole. Analysts at Berenberg and Mediobanca have both estimated that he bank has a €10bn capital shortfall.
Others have been sceptical about the bank’s prospects of using a higher capital base to improve returns.
“If you raise capital, you automatically have a lower return on equity so that is a tough sell to the market,” one senior analyst said.
He also pointed to structural challenges in bond trading. “It was only because of banks’ ability to fund themselves cheaply and to leverage themselves up that they could turn a thin-margin business into something with a decent return.”
Speaking before the news of the rights issue broke, one Deutsche Bank shareholder said: “I think it would be quite complicated to make [a rights issue] look good. What you’re asking shareholders is to give more money to support a business that has not proven yet it can adapt to a new regulatory environment.”