Deutsche Bank weighs up rights issue

Deutsche Bank is considering launching an equity raising, most likely a rights issue, with a deal possible as soon as this month, according to Deutsche insiders and ECM officials at other banks talking to the German firm about a potential deal. No final decision has been made.

“The bottom line is, what is the point of waiting?” said one Deutsche insider about a potential capital increase last week. Those at the top of the firm who will make the final decision about whether to launch are “looking at the metrics”, the insider said.

Before the deal can be launched there needs to be greater clarity on how much capital banks will be required to raise and over what time period. The Europe-wide plan to recapitalise the banking system announced by Jose Manuel Barroso, president of the European Commission, pointed to 9% core Tier 1 capital levels (see story right), which Morgan Stanley analysts suggest would leave Deutsche with a €12.5bn hole.

“Things will move very quickly after the summit and if you are the best in class like Deutsche you will be quickest”

A head of European ECM said a final decision would only come after German chancellor Angela Merkel and French President Nicolas Sarkozy presented their proposed solution to the eurozone crisis at the EU summit on October 23, but from that day things could move very quickly.

“Call me in 10 days,” he said last Friday.

A head of syndicate at another bank agreed, adding that Deutsche Bank was the one expected to move first. “Things will move very quickly after the summit and if you are the best in class like Deutsche, you will be quickest,” he said.

A deal would also have to accompany or follow earnings. Deutsche will publish its third-quarter results on October 25, two days after the EU summit.

Not a U-turn

Deutsche’s outgoing chief executive Josef Ackermann has repeatedly stated that the bank would not need to raise equity capital and last week at a conference in Berlin said he would do all he could to avoid a forced recapitalisation, adding that Deutsche had enough funds to prepare for a crisis. The bank maintains that with core Tier 1 capital at a high of 10.1% it has no need to raise capital and no plan to raise it, but other than that declined to comment.

The fact that the bank could plausibly claim to being pushed to raise equity by regulators would allow Ackermann to launch such a deal without contradicting that position. A deal would also ensure the firm was well positioned when he handed over the reins to Anshu Jain and Juergen Fitschen as co-chief executives in May.

Deutsche is one of the few listed banks in Europe that can claim to be a national champion and actually has access to public markets when it wants to raise equity. People within the bank acknowledge the significance of this position and note that an equity raising would highlight the difference between those that can choose how they recapitalise and those that are forced to do so.

A depressed share price might appear to be a reason not to proceed, but is irrelevant if the bank offers pre-emption through a rights issue. The bank currently has a market capitalisation of about €25bn so a rights issue of less than €10bn could easily secure the backing of underwriters and if shareholders follow their money it makes no difference what share price the deal is priced off as the cash required to maintain their stakes remains the same.

Precedents

When it comes to equity raisings, Deutsche has form for being both opportunistic and canny. The €9.8bn rights issue a little over a year ago was primarily to finance the acquisition of Postbank, but had a little extra tacked on to boost capital.

Deutsche also tapped the market via an accelerated bookbuild in September 2008 to raise €2.2bn – again for the Postbank acquisition. That trade came near the height of the financial crisis and when its stock had 10-day volatility of 93%.

On the weekend of September 20–21 the German authorities introduced a ban on short-selling. Deutsche leapt on a guaranteed upswing in markets on September 22 to wrap up a successful trade. Many equity bankers believe a convincing plan on October 23 would create a similar upswing in equities.

Another accelerated deal would not be enough to fill Deutsche’s capital hole, but would be a start and would show that the bank has access to capital that others do not. Its AGM on May 26 approved a capital increase of up to 10% without pre-emption rights.

Yet rival banks are circling Deutsche on the basis that the bank would rather raise all the necessary equity in one shot through an underwritten discounted rights issue.

“We are on everyone’s hot list right now,” said the insider. “We have more friends than a few weeks ago.”