Deutsche Bank: capital conundrum

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The gambit paid off. On Wednesday night, Deutsche Bank said it would take an additional €7.6bn in exceptional charges with its third-quarter results. On Thursday morning, its shares rose.

The big issue is capital, and whether Deutsche needs more of it. On the face of it, the answer is no. Of the charges announced in its unscheduled update, €5.8bn relate to goodwill impairments and so do not affect its capital position. Its common equity tier one capital following the latest announcement is 11 per cent, not as robust as some rivals, but above regulatory minimums. Still, the rights issue chatter has been persistent, and the one factor that could affect capital levels — litigation provisions, another €1.2bn of which were announced on Wednesday — is not entirely within Deutsche’s control.

Raising capital now would make joint chief executives John Cryan and Jürgen Fitschen look decisive and end the uncertainty. It would also put Deutsche near the head of the queue; it may not be the only bank tapping shareholders. But it would also come just 17 months after the bank’s last equity issue, and it would require investors to commit funds to an institution whose strategic direction is still far from clear.

Building capital without an equity issue means building up retained earnings — by selling assets at above book value, by boosting operating profits, or by curtailing distributions to shareholders. The last one is easy enough; this year’s dividend should be axed, saving about €1bn. Selling assets is trickier. Deutsche is already looking to offload its 70 per cent stake in Postbank (worth €5.4bn at the current share price) and its 20 per cent holding in Shanghai-listed Huaxia Bank (about €3bn). But turbulent markets could frustrate disposal plans.

In terms of costs, there is plenty of fat to cut; Deutsche’s cost-income ratio is a staggering 85 per cent. Mr Cryan has already warned staff to expect more pain. But cutting costs involves upfront charges, and the benefits take time to show up in results.

Still, having “kitchen-sinked” the bad news in advance, Mr Cryan now needs to use the bank’s strategy day on October 29 to outline precisely how he intends to improve profitability, and where the bank’s long-term future lies. If a rights issue is needed, investors are far more likely to provide capital if they think it will be profitably deployed, rather than replacing capital lost to litigation and fines.

Email the Lex team at lex@ft.com

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