Daily Management Review

With $8.5 Billion Cash Call, Deutsche Bank Tests Investor Patience


With $8.5 Billion Cash Call, Deutsche Bank Tests Investor Patience
As the chief executive of Deutsche Bank sought to persuade weary shareholders to sign an 8 billion euro ($8.5 billion) cheque to back his plans, he pledged on Monday to see through a strategic turnaround.
As the bank's shares sank and some expressed concerns the one proud flagship of the German economy on Wall Street had lost its way, John Cryan told analysts: "I'm 100 percent or more committed to seeing through the plans."
Speculations that Deutsche Bank needed government support had emerged last year after it faced hefty legal penalties including for the sale of toxic U.S. mortgage debt. While Cryan had said a cash call was a last resort, before setting out how it intends to turn its business around, Germany's biggest lender had previously said it would wait until global bank capital rules were finalised.
Deutsche opted on Sunday for a capital hike and also announced plans to float part of its asset management arm with regulators delaying the so-called Basel rules and markets buoyant.
It left some investors wondering whether this was the last time they would be tapped and shares in Deutsche Bank fell almost 8 percent, while the German government welcomed the cash call, the fourth such request since 2010. According to Reuters' calculations, Deutsche was put on course to have raised more than its entire 26 billion euro market value in the past roughly seven years.
"Deutsche Bank has a history of switching strategy and seldom delivered what they promised," one of the bank's top shareholders said, while another called the lender's strategy "confused". Both spoke on condition of anonymity.
After billions of euros of legal penalties and sinking profits, the bank presented the move as an attempt to put it on a stronger footing.
Stable lenders underpinned by strong capital were in Germany's best interests, investors took a more critical stance, said a German finance ministry spokesman who broadly welcomed Deutsche's move.
"This company won't be profitable overnight. The revenue must go up and costs down. And the markets have to play along, or else the bank again won't be able to hit its goals," said a third shareholder, who also asked not to be named.
Including its DWS retail asset management, which analysts have said is worth 8 billion euros, it is planning a stock market flotation of its asset management business as part of the investment "story" backing the rights issue, Deutsche Bank said.
And the bank scrapped plans to sell Postbank, which it now wants to reintegrate into its German retail bank in an about-face to its retail banking strategy.
By reuniting securities trading and corporate finance, Deutsche Bank's investment banking activities will also revert to a structure it threw out less than two years ago.
While some saw this as Cryan preparing a successor, he said this was not the case.
From 11.9 percent at end-2016, the core capital ratio - a key measure for regulators, for Deutsche Bank would be pushed above 13 percent by the combined moves.
"The question is ... whether the bank will need more yet again in a few years. Until now, none of the restructuring measures have borne fruit," Stefan de Schutter, a trader at Frankfurt-based Alpha, said.
Falling behind Wall Street rivals is Germany's biggest lender which has been weighed down by litigation costs and writedowns. Jettisoning unwanted clients and trimming its portfolio has been done by the bank in the last 18 months.

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