Deutsche Bank Avoiding Capital Increase as Jain Sees Pain

Deutsche Bank Avoids Share Sale as Jain Follows Path of Pain
The company’s loss in the fourth quarter was the biggest in four years as Jain and Fitschen eliminated 1,400 investment banking staff and set aside 1 billion euros for legal costs. Photographer: Ralph Orlowski/Bloomberg

Deutsche Bank AG co-Chief Executive Officer Anshu Jain is instilling confidence in shareholders that he’s able to restructure Europe’s biggest lender by assets without asking them to pay for it.

Jain, 50, pledged to do everything to avoid selling shares to raise capital, telling a news conference in Frankfurt yesterday that a 2.17 billion-euro loss ($3 billion) for the fourth quarter showed Deutsche Bank’s new management is ready to “take pain” as it bolsters company finances.

Deutsche Bank is overhauling operations and boosting capital levels, the lowest among Europe’s biggest investment banks, to meet stricter rules laid down by regulators. The shares extended gains in Frankfurt today after the lender said its core Tier 1 capital ratio under Basel III rules, a measure of financial strength, rose to 8 percent on Dec. 31, beating a target of 7.2 percent.

“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.”

Kian Abouhossein, an analyst at JPMorgan Chase & Co., is among those becoming more convinced that Jain and co-CEO Juergen Fitschen can strengthen the bank’s finances and produce better returns for shareholders. He upgraded the lender to neutral from underweight yesterday, saying the new management “is starting to deal with Deutsche Bank’s legacy issues.”

Share Discount

Deutsche Bank’s share price as a proportion of book value stood at 0.65 today compared with an average of 0.87 for the benchmark 46-member Stoxx 600 Banks Index. The shares rose as much as 1.4 percent, trading at 38.39 euros at 9:26 a.m. in Frankfurt, after rising 2.9 percent yesterday.

“Deutsche Bank is not expensive, but the discount has been justified due to weak capital positioning so far,” Abouhossein said in an e-mailed report to investors from London. “However the capital position was a positive surprise with fourth-quarter results.”

The company’s loss in the fourth quarter was the biggest in four years as Jain and Fitschen eliminated 1,400 investment banking staff and set aside 1 billion euros for legal costs. The loss was also about eight times larger than the average forecast in a Bloomberg survey. It posted a profit of 147 million euros in the fourth quarter of 2011.

Buy Rating

Citigroup Inc. analysts raised their recommendation on Deutsche Bank stock to buy from neutral. Christopher Wheeler, a London-based Mediobanca SpA analyst, raised his recommendation on the shares to neutral from the equivalent of sell on the back of the capital measures in a report today.

The two co-CEOs are reducing pay, cutting almost 2,000 jobs and combining Deutsche Bank’s asset and wealth management divisions to help increase return on equity after tax, a measure of profitability, to more than 12 percent by the end of 2015 from 8 percent in 2011.

“They’ve done extremely well on capital, and that’s what’s important for the stock now,” Andrew Stimpson, an analyst at Keefe, Bruyette & Woods Ltd. in London who has a market perform rating on the stock, said by telephone.

Peer Group

Deutsche Bank said it increased capital levels after it made changes to its risk models and processes and reduced riskier assets faster than expected.

Jain said the company’s core Tier 1 ratio under Basel III would increase to 8.5 percent by the end of March compared with previous guidance of 8 percent, putting it on similar footing to its peer group, albeit “at the lower end.”

Andrew Lim, an analyst at Espirito Santo Investment Bank in London, said the internal modeling Deutsche Bank used to calculate capital adequacy in the fourth quarter “may come back to haunt them” and shareholders may be forced to contribute cash after all.

“Deutsche Bank will have to increase significant equity and/or issue hybrids to achieve parity with peers, which will be significantly detrimental to earnings per share,” Lim, who has a sell recommendation on the shares, said in an e-mailed report to clients.

Jain declined to rule out shareholders contributing to a capital increase should the regulatory environment change.

Risk Models

Deutsche Bank reduced its risk-weighted assets by 55 billion euros in the fourth quarter to help raise the capital ratio, Chief Financial Officer Stefan Krause said yesterday.

Fitschen, 64, and Jain have pledged to increase the bank’s capital ratio to more than 10 percent by the end of 2015. Its biggest competitors will reach similar levels months or years sooner, according to their forecasts.

Restructuring, including the job losses, meant non-interest expenses climbed to 10 billion euros in the fourth quarter from 6.7 billion euros in the same period of 2011. The bank also said it had a 1.9 billion-euro impairment on goodwill and other intangible assets.

Concern about a possible request for investors to contribute to a capital increase meant Deutsche Bank’s shares have lagged behind rivals. They have climbed about 13 percent over the past year compared with an increase of 17 percent for the Stoxx 600 Banks Index.

The company’s investment-banking arm had an unexpected pretax loss of 548 million euros in the fourth quarter. Analysts had expected a profit of 359 million euros.

While Jain and Fitschen have bolstered confidence among shareholders, concern about capital will remain, particularly with regard to new requirements due to be introduced for banks operating in the U.S., JPMorgan’s Abouhossein said.

“The issue remains capital risk curve-balls,” he said.

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