Deutsche Bank Should Sell, Sell, Sell
So much for the notion that diluting banks' shareholders is necessarily bad for them.
Shares of Deutsche Bank AG were up as much as 8.5 percent this morning after Germany's largest bank sold 2.96 billion euros ($3.88 billion) of stock at 32.90 euros each. Only a few months ago, Deutsche Bank's co-chief executive officer, Anshu Jain, said issuing new shares wasn't in investors' interests. Oh well.
The stock sale increased Deutsche Bank's number of outstanding shares by almost 10 percent. Even so, the equity raise is a drop in the bucket. Yesterday, when the bank reported first-quarter earnings, it showed tangible equity of 41.5 billion euros as of March 31, equivalent to just 2 percent of total assets. (The percentage would look better, but still paltry, if Deutsche Bank used U.S. accounting rules rather than international standards.)
Even that may have overstated Deutsche Bank's ability to absorb losses. The equity figure included 7.6 billion euros of deferred-tax assets, which would be worthless in a crisis. Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has suggested that a reasonable ratio of tangible equity to tangible assets for banks would be 10 percent or more, excluding deferred taxes.
After taking the new stock sale into account, Deutsche Bank trades for only about 61 percent of book value, which tells you investors still don't trust the lender's balance sheet. This is understandable. For example: Deutsche Bank said 32.8 billion euros of its financial assets as of March 31 were of the illiquid, hard-to-value "Level 3" variety, meaning "the fair value cannot be determined directly by reference to market-observable information." That's equivalent to a majority of Deutsche Bank's equity.
Deutsche Bank shouldn't stop here: It should raise more equity -- a lot more. Let's hope today's rising shares will serve as encouragement. A safer, stronger bank is a more valuable one.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)