Deutsche Bank to Raise Capital Worth $11B - Analyst Blog

In response to regulatory pressure on banks to minimize risk and improve its capital position, Deutsche Bank AG DB has planned the issuance of new shares worth €8 billion ($11 billion). However, the capital increase plan awaits the German bank regulators' approval.

To resist another financial meltdown, banks in Europe are under stringent regulatory pressure to maintain a strong capital position. Therefore, amid macroeconomic headwinds and a challenging operating environment, the capital raising initiative will help Deutsche Bank meet regulatory requirements, improve its competitiveness and aid in meeting investment targets across core businesses.

Further, a strong capital position will aid the bank in clearing stress test requirements under the European Central Bank's (ECB) scrutiny this year. Additionally, such moves by the bank will negate persistent criticism over the bank's ability to absorb expected losses.

Of the total issue, 300 shares worth €6.25 billion will be issued to existing investors as a right issue. Further, the remaining 60 million shares will be purchased for €1.75 billion ($2.4 billion) by the Qatari royal family through its investment fund – Paramount Holdings Services Ltd. Notably, rights issue is expected to begin on Jun 24. Previously, the German bank raised €10.2 billion in equity issuance in 2010 and a further €3 billion ($4.15 billion) in 2013.

Apart from Deutsche Bank, London-based Barclays PLC BCS and Zurich-based Credit Suisse Group AG CS also vended their stakes to Qatar, the richest country on a per-capita basis.

After Effects

The capital raising will augment Deutsche Bank's Common Equity Tier 1 (CET1) ratio by about 230 basis points from 9.5% as of Mar 31, 2014 to 11.8%. However, such increase takes the ratio to the level already achieved by its peers such as UBS AG UBS, which recorded CET1 ratio of 13.2%. Further, the increase in capital will reinforce Deutsche Bank's leverage ratio, which came in at 3.1% as of Mar 31, 2014.

Following the capital raise, Deutsche Bank will be focused on its accelerated growth program. This program includes recruitment of experienced bankers in the U.S. and investment of €200 million over the next three years to improve its retail operations in Germany and Europe technologically. Additionally, the bank aims at hiring 100 advisers for helping biggest corporate clients and develops its wealth management team in significant emerging markets by 15% over the three years.

On the flip side, in maintaining a strong capital position, Deutsche Bank will be delayed in meeting its profitability targets as the previously disclosed target of achieving 12% return-on-equity ratio in 2015 will be met in 2016. Further, the cost-income ratio of 65% to be achieved in 2015 is now expected in 2016. Notably, the ratio was 77% as of Mar 31, 2014.

Conclusion

Deutsche Bank's initiative of strengthening its capital position by issuing new shares will result in dilution of the existing ownership. Moreover, though increase in capital will make it less risky, the profit margin will be reduced for the bank as equity investment will rise. Therefore, such initiatives taken up by the bank might lessen shareholders' confidence.

However, negating such issues, on the brighter side, the solid capital position will better enable the bank to meet its investment targets and regulatory requirements. Moreover, if the planned investment reaps benefits, the excess capital in the future would be returned to shareholders, thereby boosting their confidence.

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