Deutsche Bank's Comic Timing
If timing is everything in comedy, Deutsche Bank AG CEO John Cryan must be the funniest Yorkshireman alive.
The German bank's 8 billion-euro ($8.6 billion) share sale is smartly timed. It should be completed before the first round of the French election and should benefit from the relief in markets following the Dutch election last week.
Interest rates are finally beginning to normalize, something Bloomberg View's Mark Gilbert has noted, and the investment-banking market -- Deutsche Bank's fixed-income sweet spot in particular -- is rebounding.
We don't yet know what the take-up will be, but we do know investors are taking the dilution in their stride. Deutsche Bank shares have fallen about 6 percent over the past month -- not bad for a firm seeking to the raise the equivalent of about a third of its market value.
Deutsche Bank is feeling a bit perkier about its own outlook, too. On Monday it forecast a "meaningful" pick-up in client activity and it expects revenue to be flat in 2017 after years of shrinking.
But timing isn't everything. Few analysts expect the road to recovery to be bump-free: at 15.57 euros, the consensus 12-month target price among analysts suggests the stock has almost 11 percent to drop. Just two of the 30 analysts tracking the stock actually recommend buying it, according to Bloomberg data.
So why should investors be more optimistic than the sell side?
Plugging the capital shortfall should actually help Deutsche Bank's core business. The lender has admitted that the stomach-churning plunges in investor confidence last year cost it market share. HSBC analysts estimate Deutsche Bank's slice of the investment banking market shrank to 5.3 percent from 7.6 percent between 2014 and 2016. The bank could claw back some 1 billion euros of revenue just by looking more normal, they estimate.
The investment-banking market is turning: fixed-income revenue may climb 34 percent in the first quarter, according to JPMorgan estimates. With its capital woes behind it, Deutsche Bank should benefit from that rising tide.
The fundamentals of Europe also look better, with hopes that years of extraordinary deflation-busting stimulus are coming to an end. Yield curves are steepening, suggesting banks will make more money from the basic business of lending. Deutsche Bank wants to be bigger in Germany, where economic output accelerated in February. Rising lending rates could also mean yet another 1 billion euros in extra revenue, HSBC reckons.
Whatever his timing, though, Cryan has yet to deliver his punch line.
Investors want the bank to turn a profit, not just survive. Here, its track record has been patchy -- two straight years of negative return on equity -- and the firm still has no firm target for when it might deliver a 10 percent ROE in what it calls a "normalized" environment.
The bank will still have to cut costs and dump assets while trying to capture revenue. And while U.S. rates are demonstrably on the way to normalization, the euro zone still requires faith. Asset manager Amundi expects euro interest rates to be stuck at zero for the next 12 months.
Cryan isn't operating in a vacuum, either. Both Barclays Plc and Credit Suisse Group AG are geared to a U.S. recovery. JPMorgan analysts reckon Credit Suisse is a better investment bet than Deutsche Bank, thanks in part to its wealth-management business. The chances the Swiss bank will have to raise capital are receding, too.
For Cryan to have the last laugh, he will have to master these long-term problems, not just dodge short-term crises.
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Lionel Laurent in London at firstname.lastname@example.org
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