At last, a little good news for Deutsche Bank. Reports that the bank is considering buying back some of its own bonds have helped to calm investors' nerves. The shares posted their biggest rally in four years on Wednesday.
Why do investors like this idea? Firstly, a big bond buyback would be a show of strength, making it clear the bank has plenty of funds available. Secondly, it would signal the bank believes the true value of the bonds is higher than where they are currently trading. Finally, the bank would book a gain on the buyback that would run through to the income statement and boost its capital position.
All of which could help prevent outright panic among investors, something that has seemed distinctly possible given the way bond and equity investors have beaten up Deutsche Bank in recent days. The stock is still down about 36 percent this year.
What this mooted move wouldn't do, though, is address the broader concerns that are weighing on the bank. Specifically, there are concerns about the bank's ability to generate profit in future given economic and regulatory headwinds that threaten to squeeze revenue; concerns about the potential for further major litigation costs related to conduct issues; and worries that the bank's new leadership will struggle to execute a much-needed restructuring plan in the face of very troubled markets.
In particular, shrinking the bank's balance sheet by selling assets isn't going to be easy when markets are in such turmoil.
All of those issues have also thrown into doubt the bank's capital strength. At 11.1 percent, Deutsche Bank's Tier 1 Capital ratio doesn't leave much of a buffer -- the average of European banks is 13.1 percent, according to data compiled by Bloomberg Intelligence. There's the risk the bank will ask investors for fresh equity for the second time in about 18 months.
So far, management has resisted the temptation to go that route. That's understandable given a rights offering would be highly dilutive at the depressed share price. (The stock trades at about a third of tangible book value.) And, while a fundraising would help improve the bank's short-term capital position, it risks being taken as a sign the bank isn't fully committed to its big restructuring effort.
As for the bond buyback, it's questionable whether the bank even needs to actually go through with such a plan. The bank has already made the point this week that it can pay upcoming coupons on its riskiest debt.
Now investors are buying into the notion it has plenty of funding to buy its own debt too. That alone may be enough to draw a line under the recent market panic.
Actually completing a buyback could be expensive and may not generate enough of a capital gain to make it worthwhile. The prospect of a buyback may be enough for now -- even if Deutsche Bank never follows through with one.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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