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Qatar To Help Deutsche Bank Raise $11bn In New Equity Capital

Qatar To Help Deutsche Bank Raise $11bn In New Equity Capital

The capital measures will increase the bank’s Common Equity Tier 1 ratio and help the German lender expand its investment banking business.

Deutsche Bank said a decision to seek 8 billion euros ($11 billion) in new equity capital was driven by uncertainty about the cost of new regulations and the need for funds to expand its investment banking business.

Germany’s largest bank unveiled the capital raising late on Sunday, bringing in Qatar’s royal family as a major new investor. It plans to sell the new shares and at least 1.5 billion euros in additional hybrid debt by June 4.

It gives Deutsche firepower for the investment banking drive, especially in the United States, after a retreat by competitors Barclays, UBS and others left a gap that it aims to fill as Europe’s top debt trader.

But it also underscores how the bank fell short of ambitious turnaround targets and how burdensome fines and settlements and lagging profitability have hampered management’s efforts to fortify capital by retaining earnings.

“We need some buffer to protect on the regulations,” said the bank’s finance chief Stefan Krause in a conference call with analysts.

In a research note, Nomura analysts said the scale of the capital raising, combined with first-quarter results that fell by a third, “suggests that investors may express some caution about what may have changed to act as a catalyst”.

Shares in Deutsche Bank fell 2.3 per cent in early trading, their lowest since April 2013, before recovering to trade down 0.85 per cent, in line with European rivals.

“Whilst longer term this could put market concerns on capital to rest – which have led to an ongoing valuation discount – the capital increase is larger than expected,” said Credit Suisse analysts, who have an “outperform” rating on Deutsche shares.

TOUGHENING REGULATION

The new money helps the bank bolster the capital ratios used by regulators as the European Central Bank runs the region’s top banks through rigorous checks before it becomes the euro zone’s leading banking watchdog in November.

A stake worth 1.75 billion euros has already been placed with an investment vehicle owned and controlled by Sheikh Hamad Bin Jassim Bin Jabor Al-Thani of Qatar, Deutsche Bank said in a statement on Sunday. It plans to raise another 6.3 billion euros in a rights issue to existing shareholders.

The Qatari investor has not requested a seat on the board, nor were any special fees offered to the investor, a source close to the transaction said. “They’re an investor like anyone else,” he said.

Deutsche Bank said it would focus on an “accelerated growth programme” by hiring top bankers in the United States, investing some 200 million euros over three years on technology improvements to its retail operations in Germany and Europe, and will hire up to 100 advisers to support its biggest corporate clients.

It also aims to expand its wealth management team in key emerging markets by 15 per cent over three years.

“This should allow Deutsche Bank to take advantage of increasing consolidation in global investment banking,” said analysts at Citibank in a note, affirming a “buy” rating for the stock.

The capital measures will increase Deutsche Bank’s Common Equity Tier 1 ratio, a measure of a bank’s ability to withstand stress, by approximately 230 basis points, from 9.5 per cent at the end of the first quarter of 2014 to 11.8 per cent.

That is closer to the level already held by rivals such as UBS, which last posted a CET1 measure of 13.2 per cent. Credit Suisse last posted a ratio of 10 per cent, which is due to rise to over 16 per cent due to regulatory requirements by 2019. Barclays stood at 9.6 per cent at end-March but aims for 11 per cent by 2016.

The announcement of the capital hike came only four days ahead of the bank’s annual general meeting, where shareholders are likely to register a mixture of displeasure and grudging acceptance over the hefty capital increase.

“Deutsche Bank’s cap hike will dilute shareholders and make dividend payments per share shrink. But of course, investors have anticipated a cap hike at Deutsche Bank for a long time,” said SEB fund manager Juergen Meyer.

The bank also weakened some of the reform targets it had set out in 2012 as part of a turnaround plan. A post-tax return on equity of 12 per cent will come in 2016, the bank said, one year later than previously promised.

Likewise, it now says a cost-income ratio of 65 per cent originally envisaged for 2015 will only come in 2016. The ratio was last measured at 77 per cent at end-March.

Until now, Deutsche Bank had targeted a core tier 1 equity ratio of 10 per cent under the Basel III bank rules in their most stringent form as of March 2015. It had aimed at achieving that mainly by retaining earnings.

In slides for an investor presentation, Deutsche said it expected the pricing of the separate, previously announced hybrid bond to come before Thursday this week, when management presents its plans to shareholders.

The so-called AT1 bond issue volume is expected to amount to at least 1.5 billion euros.

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