Deutsche Bank AG is betting its 8 billion-euro ($11 billion) capital increase will help it grab market share in fixed income as a slump in trading prompts competitors including Barclays Plc to retreat.
“Is fixed income going away? No, it’s not,” co-Chief Executive Officer Anshu Jain said on a conference call with analysts today. “Do issuers and investors need these products that we are producing? Absolutely.”
Deutsche Bank raised 1.75 billion euros selling about 60 million shares to an investment vehicle of former Qatari Prime Minister Sheikh Hamad Bin Jassim Bin Jabor Al-Thani, the Frankfurt-based bank said last night. It plans to raise an additional 6.3 billion euros from a rights offer in June.
Jain, who called his company the only “significant European global firm left standing,” reaffirmed his commitment to a fully-fledged investment bank. London-based Barclays announced plans this month to cut 7,000 investment bank jobs by 2016 to focus the unit on the U.K. and U.S., and serve fewer clients. UBS AG, the largest Swiss bank, has scrapped most fixed-income trading to concentrate on wealth management.
The capital increase gives Deutsche Bank “the leeway to stay in most of these businesses and take market share because it is clear that competitors are now genuinely retreating,” Christopher Wheeler, a London-based analyst at Mediobanca SpA, said in an interview on Bloomberg Television.
Deutsche Bank fell 2.6 percent to 29.93 euros by 3:29 p.m. in Frankfurt trading, valuing the bank at 30.5 billion euros. The shares have fallen 14 percent this year, the second-biggest decline on the 43-member Bloomberg Europe Banks & Financial Services Index after National Bank of Greece SA.
Not everyone is pleased that Jain and his co-CEO, Juergen Fitschen, are sticking with their investment-banking playbook.
“Other banks are adopting new strategies and I assumed they would also restructure and reduce the investment bank,” said Peter Braendle, who oversees about 500 million euros at Swisscanto Asset Management in Zurich, including Deutsche Bank shares. “They’re sticking with an old idea of investment banking and the environment for the industry remains challenging.”
Bank of America cut the stock to underperform from neutral. The share sale “merely fills holes” in capital and the revenue outlook remains challenging, analysts Michael Helsby and Alistair Ryan said in an e-mailed report.
The capital increase is the bank’s biggest since it sold about 10 billion euros of shares in 2010 to fund its purchase of Deutsche Postbank AG. The decision to sell shares was not driven by higher expectations for litigation costs, though the outlook is “challenging,” Chief Financial Officer Stefan Krause said on the call with analysts. The bank doesn’t see big legal costs in the near term, he said.
“We have committed to being a leading global universal bank, one that few can match,” said Jain, 51. The company isn’t oblivious to the challenges facing the fixed-income industry, and will allocate resources toward businesses with higher returns and lower costs, he said.
The bank said it will probably reach its 12 percent return on equity goal in 2016, a year later than originally planned, and reduced a profitability target for the investment bank.
A slump in debt trading has weighed on earnings, with revenue from a unit trading fixed income and currencies falling 10 percent to 2.43 billion euros in the first quarter from a year earlier. Krause said the trend in fixed income in the second quarter has been unchanged from the first three months of the year, while in equities trading the bank is seeing revenue moving down this quarter compared with the year-earlier period.
The company finished last year holding less capital than all but two of the nine biggest European and U.S. investment banks, data compiled by Bloomberg Industries show.
The share sale, which the company said would boost its common-equity ratio on a fully applied Basel III basis to 11.8 percent from 9.5 percent, will propel Deutsche Bank beyond its large international investment-banking competitors, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to Bloomberg Industries analyst Jonathan Tyce.
Deutsche Bank “has taken the capital debate off the table,” UBS analysts led by John-Paul Crutchley said in an e-mailed note to clients. “Bears will question how much of the capital raise will be absorbed by legacy and litigation costs.”
Legal costs, which totaled 3 billion euros last year, have hampered the bank’s efforts to build capital. Deutsche Bank has yet to resolve probes into its role in industry-wide attempts to manipulate benchmark interest rates and currency markets. It also faces lawsuits which allege the company didn’t make adequate disclosure of U.S. mortgage-backed securities.
While increasing capital will shore up Deutsche Bank’s finances, it may slow progress toward meeting profit goals. The investment bank aims for an adjusted after tax return on equity of between 13 percent and 15 percent. The company previously targeted 15 percent ROE for the securities unit, UBS analysts said, adding that the lower goal probably reflects higher capital allocation to the division.
The company also said today it will invest to expand its investment bank in the U.S., which lags behind competitors in some fixed-income and advisory businesses. It plans to hire as many as 100 bankers to work with multinational corporations at its transaction banking and securities units.
Deutsche Bank will be global coordinator and bookrunner on the sale. The offering will be underwritten by six banks: UBS, JPMorgan, Goldman Sachs, Commerzbank AG, Banco Santander SA and Barclays, according to a person with knowledge of the matter who asked not to be identified. The sale will run through June 24.
Deutsche Bank joins London-based Barclays and Credit Suisse Group AG of Zurich in relying on funds from Qatar, the richest country in the world on a per-capita basis. Krause said that Qatar committed to exercising its subscription rights in the planned capital increase and that the investor has no protection against its stake being diluted.