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Deutsche Bank Dodging Share Sale Seen as Laggard on Capital

Deutsche Bank AG (DBK)’s plans to boost capital by cutting risk and retaining earnings don’t go far enough to bring reserves in line with competitors, analysts at four brokerages said.

Germany’s biggest bank said two days ago it would rely more heavily on a reduction in risk-weighted assets to meet a capital goal for the beginning of 2013 after second-quarter profit fell about 42 percent, missing analysts’ estimates. Deutsche Bank dropped 4.1 percent in Frankfurt trading yesterday.

“We would turn more positive on Deutsche Bank in a capital raising scenario,” JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan wrote in a note. In a share sale, “despite the dilution, the stock would likely perform well,” they said. JPMorgan (JPM) has a neutral rating on Deutsche Bank.

Banks are under orders from regulators to raise capital to avoid a repeat of the taxpayer-funded bailouts of the 2008 financial crisis. Deutsche Bank, the third-least capitalized of Europe’s 10 biggest banks at the end of 2011, came under more pressure after Credit Suisse Group AG (CSGN) bowed to demands from the Swiss National Bank to increase reserves.

“Deutsche Bank now stands out even more as a very weakly capitalized bank compared to European peers, following on from Credit Suisse’s capital plan last week,” said Andrew Lim, an analyst with Espirito Santo Investment Bank in London who recommends investors sell the stock. “The market is looking to management to disclose more aggressive measures to increase the core Tier 1 capital significantly above the current forecast.”

Jain, Fitschen

Net income fell to about 700 million euros ($850 million) from 1.2 billion euros a year earlier as expenses related to the euro’s decline against the U.S. dollar and British pound sapped profit, according to preliminary results Deutsche Bank published on July 24. Earnings missed the 999 million-euro average estimate of six analysts surveyed by Bloomberg.

The results are the first under Deutsche Bank’s dual leadership of Anshu Jain, 49, and Juergen Fitschen, 63, who took over from Chief Executive Officer Josef Ackermann, 64, at the end of May. The co-CEOs will publish full earnings July 31 and are scheduled to explain their strategy in September.

“Management says it has a ‘capital toolbox’ but they have yet to say exactly what’s in it,” said Andrew Stimpson, a banking analyst at Keefe, Bruyette & Woods Ltd. in London who has the equivalent of a hold rating on the stock. “Unless they can say they’re pursuing something specific like Credit Suisse’s plan, the issue isn’t going to go away.”

‘Panicking’ Unnecessarily

The performance of the company’s bonds suggests creditors don’t share the concern of stockholders over Deutsche Bank’s capital position, said Stimpson. The cost to insure Deutsche Bank’s debt for five years is the fourth-lowest among 10 global investment banks, according to Bloomberg Industries. The stock declined 41 percent in the past 12 months.

Armin Niedermeier, a spokesman for Deutsche Bank in Frankfurt, said the company generally doesn’t comment on analyst reports. The bank said yesterday it was sticking with its capital goals as diminished profit projections for 2012 will be countered by further “de-risking” measures.

Deutsche Bank didn’t take direct state aid in the crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008 and was six months early in meeting a capital target set by the European Banking Authority for the end of June.

The company fulfills regulatory requirements and investors who expect the bank to sell shares are “panicking for no reason,” said Dirk Becker, a Kepler Capital Markets analyst who recommends investors buy the stock. “Deutsche Bank has its plan and has shown it can and will work off its risk over the course of the year to comfortably reach its targets.”

Becker says he expects Deutsche Bank is examining which “short-term” assets it can opt to not renew when they mature so as to mitigate risk and release capital.

Credit Suisse

Credit Suisse plans to increase capital by 15.3 billion francs ($15.5 billion) this year, the Zurich-based bank said July 18, after the central bank demanded a “marked increase.” Brady Dougan, the bank’s 52-year-old CEO, said almost 80 percent of the measures are “non-dilutive.”

Capital requirements from the Basel Committee on Banking Supervision, known as Basel III, will begin taking effect at the start of 2013 and be fully implemented by 2019. Banks worldwide will be required to hold common equity of at least 7 percent of risk-weighted assets by 2019, and firms deemed systemically important, such as Deutsche Bank, will need more.

Higher Ratios

Credit Suisse said last week it will probably have a common equity ratio of 8.6 percent under fully applied Basel III rules by year-end. UBS AG (UBSN) of Zurich will probably have a capital ratio of 9.1 percent and New York-based JPMorgan, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) are likely to reach 9 percent, according to Mediobanca SpA analysts, who have the equivalent of a sell recommendation on Deutsche Bank shares.

Deutsche Bank is aiming for a ratio of 7.2 percent under the 2019 rules by the start of next year. Mediobanca analyst Christopher Wheeler said it may struggle to reach that level.

The German bank probably won’t be able to cut the more than 100 billion euros of risk-weighted assets that would be required to reach its capital goals, he said in a note yesterday. That would leave the bank further behind its biggest competitors.

“When the bank unveils an update of its long-term strategy in the autumn, there is an expectation that they provide some more color on how they plan to boost capital towards peer group levels, rather than just pointing to 2019 at the Basel III deadline,” Wheeler wrote.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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