I'm beginning to get the hang of how Deutsche Bank works, which seems to be:
- When they lose money, that strengthens their capital position, and
- When they make money, that weakens their capital position, requiring them to sell shares.
Maybe? Three months ago we talked about how ... well, I said "Deutsche Bank Improved Its Balance Sheet By Losing A Lot Of Money," which I guess seemed funnier at the time, but to be fair (1) Bloomberg said "Deutsche Bank 'took pain' in the quarter by booking a loss to boost its capital ratio without selling shares," which is about equally funny or unfunny, and (2) Deutsche did in fact have a 4Q loss of €2.2bn and yet increased its Tier 1 capital ratio by 90bps.
The Management Board of Deutsche Bank AG resolved today, with the approval of the Supervisory Board, to execute a capital increase, which is intended to raise gross proceeds of approximately EUR 2.8 billion. The purpose of the capital increase is to strengthen the equity capitalisation of the bank.
It is intended to issue up to 90 million new shares from authorised capital excluding pre-emptive rights. The new shares will have full dividend entitlement for the fiscal year 2012. They will be placed with institutional investors by way of an accelerated book build offering. There will be no public offering. Deutsche Bank AG is acting as sole bookrunner for the offering.1
Additionally Deutsche Bank intends to strengthen its total capital structure via the potential issuance of additional subordinated capital instruments of up to EUR 2
billion over the next twelve months.
To be fair Deutsche's Tier 1 capital ratio increased by another 90bps last quarter,2 making Deutsche's €1.7bn in net income this quarter just about as valuable, from a capital generation perspective, as its €2.2bn in net loss last quarter. Back of the envelope math suggests that a 2.8bn equity raise is worth another 80bps or so, and the additional 2bn of subordinated capital is worth another 60bps. So the total benefit is equal to about five months of earnings at the current pace, or equivalently five months of losses at last quarter's pace.
Why now? I enjoyed the Journal article on the matter:
After insisting for years that the bank had plenty of capital and that it could bridge any shortfall through churning out billions of euros in annual profits and through reducing risk, Deutsche Bank executives on Monday threw in the towel. ... Since taking the German bank's helm last year, its co-chief executives have said boosting its capital buffers was a top priority. But they promised not to do it by issuing new shares, which would erode the value of existing investors' shares.
"The bank aims to apply all capital levers at its disposal before considering raising equity from investors," co-CEO Anshu Jain said during a conference call with analysts last July. ... The bank's change-of-heart apparently stemmed from executives' frustration with the lack of reaction among investors to the bank's strategic changes, according to industry officials. The bank's management felt they could raise a token amount to alleviate market concerns without destroying credibility, these people said.
"This is a blatant U-turn," said a senior investment banker who was involved in the talks. "It's a real climb-down for them."
Of course, if your plan is:
- tell everyone you won't issue equity,3
- notice that everyone hates that plan, through their usual method of expressing emotion, viz. your stock price, and
- reverse that plan and issue equity,
then you run into this problem:
If DB had raised money on the back of last quarter's losses, it would have been less dilutive than the current offering. But it didn't because, of course, the price wasn't right:
“We are willing to take losses,” Jain said at the news conference. “We don’t think it’s in our shareholders’ best interests for us to issue capital given our discount to book value.”
True, but, also, still true. Issuing at an even greater discount to book doesn't help:
Still you can understand the progression. Deutsche first tried to shore up its capital ratios in easy ways that didn't cost shareholders anything - changing computer models, for one thing, or jettisoning risky and not that profitable assets for another.4 Then this quarter it did the more painful work of cutting expenses to boost income and build capital. Only then did it ask shareholders to share the pain via dilution.
Deutsche Bank Plans Capital Boost [WSJ]
Deutsche Bank undertakes capital increase [DB]
Deutsche Bank reports first quarter 2013 income before income taxes of EUR 2.4 billion and a package of measures to strengthen capital structure [DB]
Financial Data Supplement 1Q2013 [DB]
Interim Report as of March 31, 2013 [DB]
1.I love that reflex btw. "Well, sucks we need to sell billions of equity at below book value after telling the market we wouldn't." "Yeah, but: league table credit?"
2.That's Basel 2.5 total Tier 1 capital, going from 14.2% at the end of 3Q2012, to 15.1% at 4Q, to 16.0% today. See page 10 here, etc.
3.In hindsight it's a little fun to read Deutsche's earnings transcript from last quarter, which consists basically of a bunch of analysts saying "so you're promising that you won't raise any outside equity?" and Deutsche not exactly saying yes.
4.I mean, that's debatable, but here's a chart from last week's FSOC report I sort of like:
The scale is a little unclear but it sooooooooooort of says "at the margin, bank asset risk and return are not all that related." Or something.