Deutsche Bank Is Asking a Lot of People for Money
A story you could tell about global banking since the financial crisis is that banks, who had sort of lost themselves in the frenzy leading up to the crisis, have spent the last few years in deep introspection. They are learning who they are, and they are becoming more themselves. Deep down, UBS always knew it was a wealth manager, and Morgan Stanley is figuring out something similar about itself. Goldman Sachs, on the other hand, knows that fixed-income trading is at the core of its identity, and JPMorgan has looked into its heart and decided that being smirkily too-big-to-fail is a pretty good look.
If you had to describe the essence of Deutsche Bank it would probably be something like "comically over-levered universal bank," and today it embraced at least the second part of that description, reaffirming its commitment to investment banking and general bigness, despite difficulties that the presentation helpfully illustrated:
Deutsche Bank: Unfazed by horses, boats, closed law books and open law books.
But Deutsche is moving away from its core identity a little bit, by raising a pile of money to make its leverage meaningfully less comical. All in, Deutsche announced that it's raising about 11 billion euros in Tier 1 capital, which I guess doesn't sound like that much any more until you remember that Deutsche only has about 35 billion euros of Tier 1 capital now, and 1.6 trillion of assets. 1 So Deutsche Bank, which is now around 46 times levered, will soon be a svelte 35 times levered. 2
To raise money equal to a third of its current capital, Deutsche is using several of the by-now-standard methods. The main raise is a 6.3 billion euro rights offering for "up to 300 million new shares"; the Wall Street Journal reports that those shares are expected to be priced at around 23 euros each, so the actual number will be less than that. This is supposed to close in late June. There's also 1.75 billion coming from Qatar's Paramount Holdings, at a price that looks fairly generous to Deutsche.. 3
And there's about 3 billion euros in additional Tier 1 capital notes, contingent-capital securities that Deutsche will write down if its common equity Tier 1 ratio falls below 5.125 percent, and which delightfully can be written back up if the bank then recovers. 4 Here is the press release and roadshow deck for that offering, which was announced last month and delayed for a bit, but which is now in the "Execution Imminent" phase.
A weird thing about going around to basically everyone you know and asking them for billions of euros, when you did something not too dissimilar a year ago, is, you know, what do you tell them? Normally, when raising equity capital, you go out to investors and tell them an exciting story of what you're going to do with their money. Ideally, that story involves making a lot of money and giving them a cut.
Deutsche Bank has some things it wants to do with the new money; they strike me as a little afterthoughty and buzzwordy but they're on pages 28 to 31 here. "Accelerating focused growth strategy in US market," "Digital transformation of our retail model in Europe," "Investment in multinational corporations (MNC) coverage" and "Investment in capturing HNWI market share opportunities" are all on the table. But there are other, less exciting, potential uses: "Bears will question how much of the capital raise will be absorbed by legacy and litigation costs."
All in all, though, the plan is not to use this money, but just to have it around to make regulators and creditors and, sure, shareholders feel safer about Deutsche's capitalization. And making a lot of money is not particularly part of the story: "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." The sales pitch is basically that Deutsche is going to keep doing what it's doing, slightly less profitably, but with a lot more of its shareholders' money.
You cannot get too worried about how those numbers are measured, but they come from page 2 here (1,637 billion of total assets, under IFRS) and page 14 (35,331 million of CRR/CRD 4 fully loaded Tier 1 capital). Maybe another relevant measure is that Deutsche's market cap is around 31 billion euros.
Again, totally don't believe those numbers, as they mix incompatible accounting systems. There is no real answer to how levered DB is, only a series of answers determined by different rules, and my numbers don't really follow any rules. If you want rulesy numbers, DB reported a Basel leverage ratio of 3.2 percent in April, and has an end-of-2015 target of 3.5 percent now. Or if you want IFRS-only numbers, see page 61 here; 1.6 trillion in assets divided by 56 billion in equity gets about 29 times leverage; add another 8 billion euros in equity capital announced today and you get to a bit under 26 times.
The perhaps-most-comparable number for JPMorgan -- which uses different accounting systems -- is the "supplemental leverage ratio," which for JPMorgan is about 5.1 percent, or a little under 20 times levered. (See pages 67-68 here.) On the other hand, as a matter of risk-weighted capital ratios, Deutsche will now look very strong indeed. You can debate, unprofitably, which accounting measure is "correct."
They're paying 29.20 euros per share, versus Friday's 30.81 close, but they don't get the dividend for 2013, which is payable this week and is 0.75 euro per share. And I assume the characterization of the sale as an "ex-rights issue" means that the Qataris also aren't getting the opportunity to buy more shares at a big discount. Nominally Paramount is buying at about a 5 percent discount to the last sale, but here's some simple math, using the Journal's 23 euro estimate for the rights issuance:
[imgviz image_id:igWSIIU766ww type:image]
On that math, Paramount is paying about a 2 percent premium to the implied Deutsche Bank share price; that goes to about 3.5 percent if you use today's (lower) closing price.
I had not seen the write-up feature in a coco before, and it is sort of fascinating. Capital is often talked about as designed to "absorb losses," but obviously no one aspires to absorb losses. The point of capital is to smooth a bank's progress through the cycle: In good times, capital suppliers get rich; in bad times, they get wiped out first; but for banks that survive it's less "they get wiped out" than "they have huge mark-to-market losses." Letting the cocos be written back up sort of makes them feel more like capital: They profit on the way up, too. The way back up. On the other hand, letting them be written up creates a stronger expectation that they should be paid off at par, which makes them feel less capital-like.
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