Deutsche CFO outlines capital plans

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Peter Lee
Published on:

Krause says bank “comfortable” with core tier 1 ratio of 10% as news of €9 billion capital raising plans breaks.

Deutsche Bank’s share price fell today (Friday), as unconfirmed news reports broke that the bank is planning a €9 billion equity issue to support a full acquisition of Deutsche Postbank. Investors’ reaction to the news is strange, given that lack of capital at Deutsche is supposed to be a worry to many.

Deutsche has previously let it be known that it would raise additional capital in the event it moves to a full consolidation of the German post office bank. But the timing on the eve of a crucial meeting to fix proposals for the new Basle III capital regulations raises the question whether Deutsche is also preparing to boost its capital ratios.

Matthew Clark and David Hyman, analysts at KBW, point out: “Such a large amount would allow DBK to fully consummate a merger with Deutsche Postbank (€5 billion capital consumed) and also add one percentage point to the combined capital ratios (or two percentage points if aggressive merger accounting is used). Some economics would be given up by tapping the market preemptively rather than retaining earnings and reducing risk-weighted assets: we initially estimate around 19% dilution before synergies (or 14% after), however believe a persistent ‘bear point’ on Deutsche Bank’s capital would be addressed.”

Deutsche has appeared thinly capitalized compared to some European banks. At the end of the second quarter it showed a total tier 1 capital ratio of 11.3% and a core tier 1 equity ratio of 7.5%. Barclays had a core tier 1 ratio of 10%, UBS stood at 13% core tier 1. A capital raise of this size could bring Deutsche’s core tier 1 equity close to 9%, analysts calculate, and its total tier 1 capital up towards 13%.

 
“We run a high volume, but
low risk business."

Stefan Krause,
chief financial officer,
Deutsche Bank
In an interview to be published in the September edition of Euromoney, Stefan Krause, chief financial officer at Deutsche Bank, makes the case for keeping a lower capital base in order to provide a decent return to shareholders.

Krause says: “For our business model we feel comfortable with 10% common tier 1 equity.” He rejects the idea that a key lesson of the global financial crisis is that additional capital is needed to make Deutsche Bank safer.

“Several banks had a mismatch in maturities. That’s what killed real estate lending banks. Our policy is to eliminate those mis-matches as far as possible. We aim to take fees, rather than margin from maturity transformation.”

He continues: “If you are taking fees on short-term assets funded by short-term deposits, you need a very large but low risk balance sheet to make an adequate return on capital.”

He adds: “Our leverage ratio is one of the highest in the industry and I’m happy to discuss that with regulators and explain it. We run a high volume, but low risk business. And I think investors in our stock understand this. Introducing a hard limit on leverage would not decrease the risk per se. It might even shy banks away from low risk business models.”

So, if the bank is set to raise capital above and beyond the amount needed to consolidate Postbank, the bank would seem to be doing so simply to assuage regulators rather than out of any sense of a true economic need.

If Deutsche Bank does proceed with a big equity raising then it will be breaking ranks with a collection of European banks that have strongly argued for months that they do not need more capital.

Fiona Swaffield, analyst at Execution, says: “Any Deutsche Bank share issuance would put other banks where the capital position is stretched into focus eg the French and Commerzbank or where any acquisition might be used to over issue, eg Santander. We also see BBVA as a candidate for a capital raise when fully stress testing its balance sheet.”