Deutsche Bank to Raise as Much as $6.3 Billion

April 29 (Bloomberg) -- Deutsche Bank AG, continental Europe’s biggest bank, will raise as much as 4.8 billion euros ($6.3 billion) to increase capital as first-quarter profit climbed. Julie Hyman reports on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Deutsche Bank AG (DBK) (DBK), continental Europe’s biggest bank, is raising 5 billion euros ($6.5 billion) in capital, three months after co-Chief Executive Officer Anshu Jain said a share sale wasn’t in investors’ interests.

The company issued 2.96 billion euros of stock at 32.90 euros apiece today, exceeding an initial goal of 2.8 billion euros, to raise part of the funds, the Frankfurt-based lender said in an e-mailed statement. Deutsche Bank’s shares surged as much as 8.5 percent, the biggest rise since August.

Jain timed the capital increase to coincide with a report showing first-quarter earnings rose 19 percent, beating estimates. He’s boosting reserves as the Federal Reserve prepares to ask foreign banks to supply capital for U.S. units and Standard & Poor’ (SPY)s warned of a possible credit rating downgrade. Jain said in January he was willing to take losses on asset sales rather than issue new stock, citing the level of the share price.

“We are now among the best capitalized banks in our global peer group,” Jain said on a conference call with analysts and investors today. “These measures allow us to take advantage of organic growth opportunities in a changing competitive landscape.”

Photographer: Andrey Rudakov/Bloomberg

Deutsche Bank AG plans to strengthen its capital via the possible issuance of extra subordinated instruments of as much as 2 billion euros over the next 12 months. Close

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Photographer: Andrey Rudakov/Bloomberg

Deutsche Bank AG plans to strengthen its capital via the possible issuance of extra subordinated instruments of as much as 2 billion euros over the next 12 months.

Deutsche Bank’s shares climbed 6.9 percent to 35.16 euros at 3:05 p.m. in Frankfurt trading, valuing the firm at 35.9 billion euros. The Bloomberg Europe Banks and Financial Services Index rose 1.1 percent.

The bank will also sell 2 billion euros of subordinated debt, Jain said on the conference call. Chief Financial Officer Stefan Krause defined the sale as a swap of debt for equity.

‘Best-Capitalized’

The capital-raising plan prompted JPMorgan Chase & Co (JPM). to raise Deutsche Bank’s shares to overweight from neutral.

“Deutsche Bank is finally starting to address its capital issues,” analysts Kian Abouhossein and Amit Ranjan said from London today. While the firm has “transformed to one of the best capitalized” large European banks, it isn’t “out of the woods” given costs for stricter regulation and legal issues, they said.

The share sale increases Deutsche Bank’s core Tier 1 capital adequacy ratio under Basel III rules, a key measure of financial strength, to about 9.5 percent from 8.8 percent at the end of March, the lender said. JPMorgan reported a ratio of 8.9 percent in the first quarter and Goldman Sachs Group Inc. 9 percent, according to data compiled by Bloomberg Industries.

Jain, 50, said on Jan. 31 that a capital increase wouldn’t be in shareholders’ “best interests,” though declined to rule it out should the regulatory environment worsen.

U.S. Concerns

Concerns about Deutsche Bank’s capital levels prompted Standard & Poor’s (SPY) to place its rating of A+ on review last month. S&P cited litigation costs and the plan by the Federal Reserve to order non-U.S. banks to supply capital.

Deutsche Bank will probably be most affected by the Fed’s proposal, Goldman Sachs (GS) analysts including Jernej Omahen said last month. The bank may be required to move $13 billion of capital to the U.S., Goldman Sachs said.

Today’s share sale and plans to issue a further 2 billion euros in subordinated debt will probably cover about 85 percent of the requirements of the bank’s U.S. unit by 2015 under the new rules, Morgan Stanley (MS) analysts Huw Van Steenis and Hubert Lam said in an e-mailed report to clients.

Krause said Deutsche Bank’s balance sheet reductions meant “exposure in the U.S. will be manageable without profit and loss statement impact.”

The capital increase may not be “big enough to fill holes in the balance sheet,” said Andrew Lim, an analyst at Espirito Santo Investment Bank.

Lagging Behind

Deutsche Bank’s shares have lagged behind peers. Today’s advance took gains over the past 12 months to 7.1 percent. That compares with a 26 percent rise for the Bloomberg Europe Banks and Financial Services Index. The bank has a price-to-book ratio of 0.59 compared with 0.83 for the index.

“They’re trying to protect shareholders” by going for a “small” dilution, Dirk Becker, an analyst with Kepler Capital Markets who recommends clients buy Deutsche Bank stock, said by phone from Frankfurt.

Profit Climbs

Separately, Deutsche Bank said first-quarter net income climbed 19 percent to 1.65 billion euros, exceeding the 1.21 billion-euro average estimate of six analysts surveyed by Bloomberg.

The higher earnings were driven by administrative cost- cutting and staff reductions, Deutsche Bank said.

The first quarter “is seasonally a good quarter for us, but this is an early indication of the franchise’s ability to produce strong returns in what remains a challenging and uncertain environment,” Jain said.

Krause said that the company “materially completed” a plan to eliminate about 1,500 positions at its investment bank unit and related support.

Pretax profit at the investment bank fell 2 percent in the first quarter from a year earlier to 1.85 billion euros. Cost reductions there failed to offset a 4 percent decline in revenue to 4.6 billion euros.

Deutsche Bank set aside 354 million euros against losses from non-performing loans in the quarter. The provisions were expected to total 425 million euros, according to analysts.

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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