Despite its widely telegraphed $8.5 billion public offering with another $2 billion expected to be raised from asset sales, Germany's biggest lender is down sharply this morning as much as 6.9% (currently 6.1% lower) as Wall Street analysts dig through the details of the bank's latest massive restructuring, which as reported yesterday seeks to undo many of the changes implemented by CEO John Cryan over the past two years (and which will lead to an 80% reduction in the bank's 2016 bonus pool). The key concern, as some analysts most notably Citi have noted, is that DB's attempt to shore up capital may not be enough with the bank potentially needing another €2 billion to a grand total of €12.8 billion, while some have pointed out that DB may have opened a Pandora's Box for other, similarly undercapitalized European banks.
Here are some of the early reactions this morning from a wide selection of sellside analysts:
Citigroup (sell/high risk)
- In a worst -case scenario Deutsche Bank may need EU12.8b in additional capital instead of EU10b that’s currently planned
- Leverage ratio is the key capital constraint, saw 2018 leverage ratio at 4.0% before announcement of latest capital increase, says that’s a shortfall of ~EU5.8b to leverage ratio target of 4.5%
- Says that estimate included EU1.8b from successful sale of 70% stake in Postbank
- Also Deutsche has announced additional revamp costs of EU2b
- New cost target for 2018 adj. costs is still EU22b, but now includes reintegration of Postbank that will cost about EU3b; target for 2021 costs is EU21b
- Plan to keep all of Postbank and IPO 25% stake in asset management will boost analysts’ estimates for EPS by 2%
- Says rights issue will push CET1 ratio to 14.1% which is above the company’s target of more than 13% and above SREP requirement of 12.25%
Goldman Sachs (neutral)
- Says the management actions as necessary and sufficient to decisively conclude the capital debate and thus have an overall positive impact on the financial stability of the group. That said, expect the market to scrutinize implied dilution and ongoing profitability challenges.
- Need for capital: known and necessary. The fact that DBK needed to improve its capital position was widely understood – we had estimated DBK’s capital shortfall at €6.7 bn (most recently in our January 27 report: “Deutsche Bank: Franchise damage, capital gap and need to detail recap path”). Therefore, the announced recap action, in itself, will not come as a surprise.
- Quantum of cap hike: high, but puts an end to capital debate. The total targeted increase in capital is ~€10 bn, consisting of an €8 bn rights issue and >€2 bn from planned asset disposals. In our view, the quantum of capital targeted is sufficient for this (long running) capital debate to conclude.
- Strategic and profitability debates will continue. DBK has been faced with two basic challenges: (1) its capital position, which has now been addressed; and (2) lack of a high-ROE platform, which continues. In this context, we view the 10% “normalized” ROTE target as ambitious.
- Details of the strategic plan will be key from here
- New cost target looks tough at first glance, is 5% better than MS’s estimate for EU23.1b that it considered optimistic and 11% better than consensus
- Dividend plan is signal of confidence in rehabilitation of business, capital position
- Reversal of negative flows in Asset Management in past 2 months is encouraging
- Litigation is not over yet with long list of smaller cases outstanding
- Management needs to address "credible integration of Postbank," provide clarity on revamp of Investment Banking and new CIB portfolio, stabilize outflows and restore confidence in Wealth and asset management businesses
- Capital increase is unexpected, should end investor debate about low capitalization
- Holding on to Postbank makes sense strategically, also given low valuation in current market
- Partial IPO of Deutsche Asset Management is negative as it means bank is giving up some of its stable business with low capital consumption
- New financial targets look achievable, unchanged ROTE target of at least 10% is more ambitious given higher capital base
- Higher capital ratios, low cost base should be well received by investors
- Sees economic earnings dilution of 23% from capital increase of EU8b, or ~687.5m shares
- Sees that partly compensated by ~17% earnings benefit from lower costs
- Assumed minority stake in IPO in Asset Management is ~4% earnings dilutive
- All-in-all sees 2018 earnings dilution at 11%
- Sees 2018 fully-loaded CET1 ratio at 14.1%, if additional EU40b in Basel 4
- Risk Weighted Assets are included, pro-forma 2018 CET1 seen at 12.8%
- New cost targets are a "material improvement" on old targets
- Cost details matter, including divisional breakdown, how much hinges on agreement of works council, what impact they’ll have on revenue
Kepler Cheuvreux (not rated)
- Sees new market price of EU16.7%/share given EU8b rights issue at likely discount of 39% vs Friday’s close for price of EU11.65/share with issuance of 637.5m new shares
- CET1 ratio of 14.1% post capital increase plus EU2b in capital accretion over 2 years "seems solid"
- All-in-all new financial targets see profitability target of ~10% post-tax ROTE vs former target of >1 0% post-tax ROTE
- Says revenues and/or increased restructuring costs seem damp financial results
- Notes positive developments in terms of adj. costs of less than EU21b including Postbank
Finally, as WSJ writes, in an interesting sales desk note to clients over the weekend, Bernstein Research, which does not officially cover Deutsche Bank, said candidly that Deutsche has opened the Pandora’s Box and European banks are more than an ocean apart from their American counterparts, which are much healthier. Bernstein wrote:
IS DBK DOING THE RIGHT THING?
Of course it is. But the right thing in banks doesn’t mean you’re a “buy”. Cost control (esp at bonus time) was the right thing for shareholders. Interesting, and if you recall, they also didn’t clean up in FICC in 4Q – something the world and its wife had expected them to do. Remember cleaning up in FICC is like going to the casino: even if the odds are heavily in your favour (which they were in 4Q) you still need to bet big, and this consumes RWAs and capital – which they don’t have. DBK’s in retrenchment mode and if these headlines are correct, it cements a core view amongst many that DBK’s capital bridge really can not be met by organic earnings alone. More importantly, European bank tailwinds in the past 9 months are being met with capital raises where needed. All at a time when JPM is close to paying 100% of its earnings. We’re world’s apart.
The biggest bank in Germany, the country that’s the biggest subsidiser of the European project, the home of the European regulator, is raising equity. For everyone else, what’s their get-out-of-jail free card now? Until now, the counter-argument will always have been that DBK was short – so pick on your own country’s banks before you pick on mine! Well that doesn’t work anymore. Whilst it’s easy to be sensationalist here, it’s definitely worth thinking about what responses the more levered plays (French/CBK/Weaker Southern Europeans) will have now. On balance, I don’t think we quite head in such an extreme direction so quickly – but the divergence between US and European Financials becomes even greater. Tailwinds in Europe are much more likely to be met with raises…
Source: Bloomberg, primary sources