Despite its widely telegraphed $8.5 billion public offering with another $2 billion expected to be raised from asset sales, Germany’s biggest lender is down sharply this morning as much as 6.9% (currently 6.1% lower) as Wall Street analysts dig through the details of the bank’s latest massive restructuring, which as reported yesterday seeks to undo many of the changes implemented by CEO John Cryan over the past two years (and which will lead to an 80% reduction in the bank’s 2016 bonus pool).
The key concern, as some analysts most notably Citi have noted, is that DB’s attempt to shore up capital may not be enough with the bank potentially needing another €2 billion to a grand total of €12.8 billion, while some have pointed out that DB may have opened a Pandora’s Box for other, similarly undercapitalized European banks.
Here are some of the early reactions this morning from a wide selection of sellside analysts:
Citigroup (sell/high risk)
In a worst -case scenario Deutsche Bank may need EU12.8b in additional capital instead of EU10b that’s currently planned
Leverage ratio is the key capital constraint, saw 2018 leverage ratio at 4.0% before announcement of latest capital increase, says that’s a shortfall of ~EU5.8b to leverage ratio target of 4.5%
Says that estimate included EU1.8b from successful sale of 70% stake in Postbank
Also Deutsche has announced additional revamp costs of EU2b
New cost target for 2018 adj. costs is still EU22b, but now includes reintegration of Postbank that will cost about EU3b; target for 2021 costs is EU21b
Plan to keep all of Postbank and IPO 25% stake in asset management will boost analysts’ estimates for EPS by 2%
Says rights issue will push CET1 ratio to 14.1% which is above the company’s target of more than 13% and above SREP requirement of 12.25%
Goldman Sachs (neutral)
Says the management actions as necessary and sufficient to decisively conclude the capital debate and thus have an overall positive impact on the financial stability of the group. That said, expect the market to scrutinize implied dilution and ongoing profitability challenges.
Need for capital: known and necessary. The fact that DBK needed to improve its capital position was widely understood – we had estimated DBK’s capital shortfall at €6.7 bn (most recently in our January 27 report: “Deutsche Bank: Franchise damage, capital gap and need to detail recap path”). Therefore, the announced recap action, in itself, will not come as a surprise.
Quantum of cap hike: high, but puts an end to capital debate. The total targeted increase in capital is ~€10 bn, consisting of an €8 bn rights issue and >€2 bn from planned asset disposals. In our view, the quantum of capital targeted is sufficient for this (long running) capital debate to conclude.
Strategic and profitability debates will continue. DBK has been faced with two basic challenges: (1) its capital position, which has now been addressed; and (2) lack of a high-ROE platform, which continues. In this context, we view the 10% “normalized” ROTE target as ambitious.
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