At the start of last month, Deutsche Bank raised €2.96 billion of equity in an accelerated bookbuild, acting as sole lead on its own deal.
The move surprised analysts, partly because the bank had been doing a good job of generating capital organically, partly because it had for so long resisted calls to raise external capital, other than for the acquisition of Postbank.
Co-chief executive Anshu Jain now says it is a core part of the bank’s plans to get through the uncertain times between now and 2015: "We began this journey with a Basle III pro forma core tier 1 capital ratio of below 6%, which was behind the leaders in our peer group. In September, we stated publicly that our aim is to raise that to 10% by first quarter 2015.
"We listened carefully to many stakeholders, regulators, investors, analysts and commentators as we developed our strategy. And subsequently, the message was clear. Resolving the capital issue has to be our top priority.
"For two consecutive quarters, we beat the targets we set ourselves. In nine months, we raised our Basle III tier 1 ratio from below 6% to 8.8% versus a raised target of 8.5%. This is equivalent to a capital raise of over €10 billion."
Analysts at Credit Suisse damned this effort with the faintest of praise, greeting it with the classic headline on the German bank’s stock: ‘Upgrade to neutral’.
The Credit Suisse analysts note: "It is unclear to us why this action has been taken now, and we think this could be the result of additional German regulatory demands, but this still should give the group more strategic flexibility going forwards."
If you believe more capital is good, then the new offering transforms Deutsche, for so long a capital laggard, into a capital leader, with a 9.5% Basle III tier 1 ratio. Credit Suisse notes: "This puts the group ahead of most peers on a reported basis, with Barclays at 8.4%, JPM 8.9%, Citigroup 9.3% and BofA at 9.4%."
In addition, Jain says the bank might issue up to €2 billion of subordinated capital in the next 12 months. He does not say in what form, but this will come at a cost, while running higher tier 1 capital ratios can only reduce return on equity. Jain explains: "We’re not only responsible for the sound commercial functioning of the institution. We must also ensure that Deutsche Bank is resolvable in the eyes of the most demanding requirements of a changing regulatory landscape around the world."
This move comes just as US regulators are preparing to demand that much more dedicated capital be allocated to the bank’s US operations. One banker says: "You can see why the Americans might do this. Deutsche has a large trading and investment banking operation in the US supported by an apparent abundance of liquidity and capital, but that’s not all in the US. And we’ve seen regulators in Europe and the UK appear to establish informal requirements to limit transfers to foreign subsidiaries."