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Thursday, 30 October 2014

No pain, no Jain?

Rights issue rethink could ease sting for Deutsche

A rights issue U-turn would be a bitter bill for Anshu Jain and Juergen Fitschen to swallow. Deutsche Bank’s co-chief executives vowed in September to strengthen the bank’s finances without tapping shareholders. But U.S. capital rules, non-core losses and a looming Libor settlement have upped the ante.

Deutsche goes into 2013 lagging its peers on capital. True, it should narrow the gap by the end of March, when it expects to have an 8 percent core Tier 1 ratio under Basel III. But investors want big universal banks with sizeable capital markets exposure to be around 10 percent as soon as practicable. A 5 billion euro rights issue would propel Deutsche’s ratio above 9 percent by the spring. That would put the bank on a par with better capitalised rivals like UBS.

While Jain and Fitschen want to build capital organically, there are good reasons to accelerate. For starters, Deutsche may be unable to shift enough capital to the United States to support its Taunus subsidiary. Based on a 3 percent ratio of Tier 1 capital to assets, Taunus had an equity shortfall at the end of 2011 of $16.2 billion (12.4 billion euros). Foreign banks may not be required to make up their shortfalls in the United States until July 2015, but regulators can be fickle. And Germany’s BaFin would be more likely to approve a transfer if Deutsche’s capital position was stronger.

Then there’s Libor. In September, Deutsche put aside a sum for a possible settlement based solely on Barclays’ $450 million settlement. That was before UBS received a $1.5 billion fine. UBS was an egregious offender and Deutsche may be far less culpable, if it is reprimanded at all. Still, a prudent approach to the fine calls for additional provision.

Finally, Deutsche’s non-core unit could conceivably impose heavy losses in excess of the recurring quarterly 500 million euro charge that management foresees.

Heads usually roll when management executes a volte-face of this kind. But Credit Suisse boss Brady Dougan survived a U-turn over capital in July, albeit with the support of some big anchor investors. And Jain and Fitschen could offer their own 2012 bonuses as a sacrificial salve. Besides, bank shares are on a tear following the relaxation of Basel liquidity rules. A rights issue now might be favourably received.

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Deutsche Bank gave guidance on Dec. 13 that it faced a fourth-quarter loss as a result of one-off charges associated with its creation of a non-core unit. Research by Espirito Santo Investment Bank estimates that even if the Q4 loss is as much as 3 billion euros, Jain and Fitschen can reduce tax assets and crack down on pay to ensure they meet an 8 percent core Tier 1 ratio target under Basel III by the end of March.

Dan Tarullo, the regulator in charge of banking at the Federal Reserve, said on Nov. 28 that foreign banks may be required to capitalise their U.S. units separately.

Taunus, Deutsche Bank’s U.S. subsidiary, had $354.7 billion of assets at the end of 2011 with negative Tier 1 capital of $5.6 billion after writedowns and the deduction of deferred tax assets, according to Federal Reserve data.

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