Deutsche Bank Sees Option of Raising Cash Through Stock Sale

  • Bank’s preferred option would be profit growth, CFO says
  • Earnings miss estimates as trading revenue falls short

Breaking Down Deutsche Bank Earnings

Deutsche Bank AG could sell stock to shore up capital eroded by two years of losses, Chief Financial Officer Marcus Schenck said on Thursday, an option the lender has sought to avoid to prevent damaging shareholders.

“We’d never rule out any instruments,” Schenck said in an interview with Bloomberg Television. “The primary tool we want to use is organically generate profit,” though “if need be, or if we see value, we could in principle also deploy the tool of raising equity.”

The comments are the strongest indication yet that the Frankfurt-based lender is considering tapping shareholders as misconduct fines weigh on earnings. The bank lost money in 2015 and 2016, but said it hopes to post a profit this year. The stock on Thursday fell the most in four months after fourth-quarter results missed analysts’ estimates as clients concerned about the bank’s financial strength stepped back from trading.

While Chief Executive Officer John Cryan said previously that a share sale wouldn’t reverse the problem of “poor organic capital generation,” some analysts said the bank may have no other option.

“We see a risk of further litigation charges and believe a rights issue is still inevitable,” Citigroup Inc. analysts including Andrew Coombs said in a report.

Marcus Schenck, chief financial officer at Deutsche Bank, talks with Bloomberg’s Matt Miller

Source: Bloomberg

Deutsche Bank on Thursday said its net loss narrowed to 1.89 billion euros ($2.04 billion) in the three months through December, from 2.12 billion euros a year earlier. Analysts had expected a shortfall of 1.32 billion euros.

Its common equity Tier 1 ratio, a key measure of capital strength, rose to 11.9 percent at the end of December from 11.1 percent three months earlier. The September level was the fifth-lowest of Europe’s biggest publicly traded banks, data compiled by Bloomberg show. The bank reiterated on Thursday that it wants to lift the ratio to at least 12.5 percent by the end of 2018.

The ratio will probably fall in the first quarter as the lender does more business, for example in its trading unit, Schenck said. The bank also signaled it faces further litigation costs in 2017. An update of the Basel III capital standards will probably add about 100 billion euros to its risk-weighted assets, which stood at 358 billion euros at the end of 2016, Schenck said.

“We welcome the improvement in the capital position, but wonder if this has come at a cost to the profitability of the core franchise,” the Citigroup analysts said in a report.

The stock fell 6 percent to 18.03 euros at 4:50 p.m. in Frankfurt, after earlier slumping as much as 7.1 percent. The shares had almost doubled from a record low in September through yesterday, as the bank settled some of its biggest legal matters and the election of Donald Trump as U.S. president prompted speculation that bank regulation will be weakened.

Trading Revenue

Debt trading revenue rose 11 percent to 1.38 billion euros, falling short of the 1.68 billion-euro average estimate of 10 analysts in a Bloomberg News survey. Equity trading revenue, which analysts had expected to be flat, fell 23 percent to 428 million euros.

Clients reduced balances and trading after news broke in September that the U.S. had initially requested $14 billion to end a probe into the bank’s sale of mortgage bonds. The lender last month settled the investigation for half that amount. Cryan said clients have since come back in a “meaningful” way and the bank should be profitable this year.

John Cryan on Feb. 2.

Photographer: Krisztian Bocsi/Bloomberg

“The fourth quarter was arguably the most difficult quarter in almost a decade for us, given all the noise around the bank,”Schenck said in the interview. “And that took its toll on the performance, in particular in our markets business.”

Deutsche Bank took 1.59 billion euros of litigation charges in the fourth quarter, more than the 1.28 billion euros analysts surveyed by Bloomberg News had expected on average. While 2015 and 2016 were “peak years for litigation,” this year will continue to be “burdened by resolving legacy matters,” Deutsche Bank said in slides on its website.

Last month, Deutsche Bank finalized the settlement with the Justice Department over its handling of mortgage-backed securities before 2008. The bank agreed to pay a $3.1 billion civil penalty and provide $4.1 billion in relief to homeowners. This week, it was fined $629 million by U.K. and U.S. authorities for compliance failures that resulted in the bank helping wealthy Russians move about $10 billion out of the country.

‘Intense Pressure’

A criminal investigation of the trades by the Justice Department is ongoing. The bank also hasn’t resolved investigations into whether it manipulated foreign-currency rates and precious metals prices.

“I don’t want to beat around the bush: There were times in 2016 when we were under intense pressure,” Cryan said at a press conference in Frankfurt. “This was true above all in the autumn,” when the bank saw “weeks of debate and speculation” about its financial strength.

To help shoulder litigation costs, the company said last month that it will scrap the bonuses of its top executives for a second straight year and slash variable compensation for other senior employees to shore up capital. Deutsche Bank is also considering raising capital through the sale of a stake in its asset management unit in an initial public offering, according to people familiar with the matter.

“There are disposals available to us, and we executed quite well I would say on those in the last 18 months, which would free up capital,” Schenck said.

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