On May 18, Deutsche Bank has announced a plan to raise € 8bn ($ 11bn) in new capital. The increase will consist of € 6.3bn in a rights issue and a further € 1.75bn from the Qatari royal family. The capital increase will be the second largest ever launched by the firm.
A new Investor
As already mentioned, a stake worth € 1.75bn has already been placed to an investment vehicle owned and controlled by Sheikh Hamad Bin Jassim Bin Jabor Al-Thani of Qatar. The “position” of this new investor is not clear at the moment. Deutsche Bank said that the royal family will become a stable investor of the bank and added that “The Qatari investor has not requested a seat on the board and they are an investor like anyone else.”
However, even if for the Qatari royal family this investment may be less impressive than it seems to us, who would leave an investment of almost € 2bn “unattended”? Probably, the bank did not want to worry the market with the prospect of changes in the governance; nevertheless, when waters will calm down, it is logical to expect an increase of the influence of the new investor regarding the future strategic choices.
In the past months, analysts had estimated a capital increase of only € 5bn. Deutsche Bank had a very high financial leverage ratio of about 1/40, which will decrease to a more acceptable 1/33 after the hike. Moreover, thanks to this operation, which should be completed by June 24, the common equity tier 1 ratio will raise from 9.5 % to 11.8%.
From this point of view, Deutsche Bank, which was considered by many analysts not sufficiently capitalized and at risk of being “blacklisted” by the ECB at the end of the asset quality review, has been proactive and has increased its margin of safety against the new Basel 3 regulations.
The stock lost only 1.7% on the day after the announcement and trades just below €30 now. It seems that markets have generally well received the announcement, although doubts remain on both long-term profitability and the impact of legal costs caused by various lawsuits. As a matter of fact, Deutsche Bank has postponed the objectives of profitability (return on equity 12%) and cost cutting to 2016 from 2015.
We must also point out that Deutsche Bank capital increase will dilute shareholders and make dividend payments per share shrink. Analysts at Credit Suisse estimate a cut of the profits per share of 25-26% for the next three years.
Will other banks follow the path of Deutsche Bank?
In our view, yes. Many banks (mainly because of the new regulation) are operating heavy changes, trying to refocus on their core businesses, and solid capital requirement is the basis for the revival. Many banks are already in compliance with the requirements of Basel 3, but we expect that in order to grant an additional margin of safety, it is very likely that other institutions will operate by the end of the year to strengthen their capital basis.
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