Cash call helps shore up Deutsche Bank’s balance sheet

Anshu Jain declared the end of Deutsche Bank’s “hunger march” after it concluded a long slog to shore up its balance sheet by bringing in €3bn in fresh equity.

Investors rewarded the co-chief executive of Germany’s largest bank by assets for yielding on his reluctance to bring in new capital. After a quickly carried out capital raising Deutsche’s shares rose 6.1 per cent on Tuesday, despite an issue that dilutes shareholders by almost 10 per cent. Some analysts upgraded Deutsche’s prospects.

However Mr Jain’s belief that the bank’s problems with a lack of capital were now “off the table” – and that the bank could even turn towards raising dividends for its hard-pressed shareholders – is not unanimously shared.

Deutsche “is not out of the woods yet”, wrote Kian Abouhossein, an analyst at JPMorgan. “However [it] has the cushion to take some unexpected hits ... Deutsche Bank is finally starting to address its capital issues.”

Deutsche’s capital and funding issues “far outweigh a mere €2.8bn capital increase”, said analysts at Espirito Santo. “Our concern is that the admission of the need for capital merely raises scrutiny that the bank needs even more.”

The bank has leapt up the ranks of its peers in terms of the balance sheet strength they will be able to claim under incoming Basel III bank rules. These are set to take effect in 2019 but are already viewed as a benchmark. Deutsche’s ratio of more than 9.5 per cent under those rules after Tuesday’s equity raising puts it ahead of almost every other big global investment bank.

With Deutsche reporting a ratio under 6 per cent by the same rules less than 18 months ago, “resolving the capital issue had to be our top priority”, Mr Jain admitted.

But the timing and size of the current equity call caused puzzlement, especially given the bank’s previous resistance to the idea of going direct to investors.

Mr Jain’s argument is that an earlier capital raising could not have been done at a scale that would have had much impact and said Deutsche needed a “launch pad” from which to first improve the balance sheet by trimming risks and retaining earnings. Over the past nine months those measures amounted to the equivalent of more than €10bn in capital, he said on Tuesday – moving the bank to the point where the relatively small cash call could take it within touching distance of its targets “in one fell swoop”.

For many analysts, regulatory factors will have also played a part in the capital raising – in spite of Mr Jain’s insistence that regulators have not had a “gun to our head”.

One key capital demand looming for Deutsche is the threat by the US Federal Reserve to force foreign banks to recapitalise and increase standalone funding of their subsidiaries. The plan, lobbied vigorously against by European and some US banks, would impact Deutsche the most given that 37 per cent of its group assets are in the US.

On this issue, Deutsche’s capital plans – including €2bn in junior capital issuance over the next 12 months – should help ease investors’ concerns about the Fed’s plan. Huw van Steenis, analyst at Morgan Stanley, said they could meet 85 per cent of the estimated capital deficit in the bank’s US subsidiaries.

One analyst said the equity raising – which makes Deutsche better capitalised than JPMorgan and Citigroup – gave it better arguments to push back the Fed’s funding proposals. “They are losing the battle to win the war [on funding],” he said.

Despite the increase of Deutsche’s core tier one capital ratio to a level that beats most global banks apart from Swiss rival UBS, some analysts also remain worried about the German lender’s high leverage.

Leverage ratios measure a bank’s total assets – rather than its risk-weighted assets – related to its capital, and are another closely watched indicator. Basel rules will also bring in a leverage ratio of 3 per cent that banks must meet.

James Chappell, analyst at Berenberg, said that, even after this week’s capital raising, Deutsche’s leverage ratio would still be about 2 per cent. “This still requires over four years’ worth of profits to get above the 3 per cent level required in 2019 and, in our mind, delays dividends,” he wrote.

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