Abigail with attitude: Celebrating Autostrade, questioning Deutsche Bank

Abigail Hofman
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In late June, I attended the International Capital Market Association’s dinner at the Savoy Hotel in London to celebrate the 50th anniversary of the Eurobond market. In 1963, the first fixed-rate Eurobond was launched by Autostrade. The issue was $15 million of 5.5% guaranteed bonds due 1972/78. Icma had gathered together an impressive group of market participants from all over the world. Issuers and bankers mingled and reminisced. Euromoney, which was founded in 1969 and has chronicled the development of and the milestones in the Eurobond market, was a sponsor of the dinner. As I scanned the guest list, I saw many familiar names: Cyrus Ardalan, Samir Assaf, Johannes Attems, Allegra Berman, Charlie Berman, Viscount Bridport, Waltraut Burghardt, Lachlan Burn, Maria Cannata, Christopher Carter, David Clark, Nicholas Clegg, Joe Cook, Frank Czichowski. And that brings me to only the fourth letter of the alphabet.

The syndicate area was particularly well represented at the dinner. I glimpsed John Walsh, ex CSFB, holding court to a group of former colleagues (John Fleming, Martin Egan and Simon Meadows) and peers (such as Roman Schmidt). The top table was replete with elder statesmen: Peter Spira, Stanley Ross, Eugene Rotberg, Rupert Hambro, Hans-Joerg Rudloff, Stany Yassukovich and Sir David Walker took turns to address the crowd. Banking in Europe today faces many challenges. As I left the party, I did wonder whether the glory days of the international capital markets were behind us: buried in a blur of regulation and public revulsion. But maybe I am being too pessimistic.

Deutsche Bank was one of the five underwriters that brought the Autostrade deal to market. And for the past few months, I have been unable to get a handle on what is happening at the German bank. Ever since the financial crisis, market participants and commentators have muttered that Deutsche needed to raise a substantial amount of capital. The bank did an equity issue in the autumn of 2010 when it increased its stake in Deutsche Postbank.

But the new co-chief executives, Jürgen Fitschen and Anshu Jain, who took over from Josef Ackermann in 2012, did not seem keen to top up the coffers further. Indeed, Bloomberg cites Jain as stating in late January 2013 that a capital increase would not be in shareholders’ best interests. Nevertheless, three months later, Deutsche raised some €3 billion of new capital, pricing the shares at €32.90. The share sale increased Deutsche’s core tier 1 capital adequacy ratio, under Basle III rules, to about 9.5%.

The reason for this volte-face is not clear. But management’s hand might have been forced. The US authorities are proposing that foreign banks supply additional capital for their US subsidiaries. So it must have been irritating for the Deutsche duo when Thomas Hoenig, the Federal Deposit Insurance Corporation’s vice-chairman, savaged the bank in June, stating that: "They’re horribly under-capitalized. They have no margin for error." Hoenig grumbled that the correct measure for the bank’s riskiness was not Basle III, but the leverage ratio, which compares shareholders’ equity with total assets without using risk weightings. "To say that we are under-capitalized is inaccurate," riposted Stefan Krause, Deutsche’s chief financial officer.

Then Berenberg’s equity research department waded into the debate. In a masterly report on European banks published in June, analysts Nick Anderson and James Chappell maintained their sell rating on Deutsche Bank with a price target of €23. "While the market took the capital raise at Deutsche Bank (DBK) positively, we still believe DBK depends on leverage to deliver double-digit returns. With retained profits unlikely to reduce these ratios in the near term, we still believe DBK is likely to need to resort to outside equity to reduce this as regulatory pressure continues to grow."

I am neither an equity analyst nor a regulator, so I will leave the nuances of financial ratios to the experts. However, I do wonder what the unique selling point is for Deutsche in the brave new world of global finance after the credit crunch. It seems to me that the US banks are pulling ahead in the space of global universal banks. Can Deutsche enter the top tier along with institutions such as JPMorgan, Bank of America, Citi and Goldman Sachs? I’m not convinced it can, especially if it finds its US operations are capital constrained. Unlike HSBC or UBS, Deutsche is not well known for the strength of its Asian franchise.

Deutsche will always be a German national champion and will be recognized as part of a European bulge bracket. However, as Europe treads a more socialist path, the US will rediscover its role as the heart of capitalism. European banks, trammelled by interfering regulators and the politics of envy, might find themselves shivering outside the warm room with their noses pressed up against the window. I am reminded of a Dickens novel. Certainly, if Mr Hoenig has his way, the going will be tough.