Deutsche Bank Price Estimate Revised To $44 After $11.5 Billion Capital Issuance

June 10th, 2014 by Trefis Team
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Deutsche Bank

Last month, Deutsche Bank (NYSE:DB) announced its intention to issue fresh equity worth roughly €8 billion (~$11 billion) in a bid to improve its Basel III common equity Tier 1 (CET1) capital ratio. [1] The largest German bank successfully met this target last week after issuing 299.8 million new shares priced at €22.50 (around $30.50) for gross proceeds of €6.75 billion. [2] The bank had already raised €1.75 billion in May by placing 60 million shares privately with Paramount Holdings Services (owned by Qatar’s royal family). Notably, the more recent rights issue priced Deutsche Bank’s shares roughly 25% lower than its market price at the time of its announcement.

The rights issue complements the €5 billion (~$6.8 billion) in Additional Tier 1 capital the bank raised in two phases over the last two months, and should boost its CET1 ratio from its current figure of around 9.5% to almost 12% – bumping the bank from the bottom of the list of global systemically important financial institution (G-SIFIs) in terms of capital adequacy to near the top. [3]

In view of the increase in Deutsche Bank’s number of outstanding shares by 30% and the corresponding change in its capital structure, we have revised our price estimate for the bank’s stock downwards from $52 to $44. The new estimate is roughly 15% ahead of its current market price.

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See our full analysis for Deutsche Bank

Deutsche Bank has worked hard since early 2013 to shore up its balance sheet in order to comply with stringent Basel III capital requirement standards. Drawing severe criticism for being one of the worst capitalized G-SIFIs at the end of 2011 with a pro-forma Basel III CET1 capital ratio of 6.6%, the German banking giant has slashed billions in non-core assets since then and also issued fresh equity worth €3 billion last April to push the figure to 9.5% (see Understanding Deutsche Bank’s Challenges With Basel III Compliance). As Deutsche Bank was placed in ‘Bucket 4’ by the Financial Stability Board (FSB) as part of its classification of the G-SIFIs, the bank is subject to an additional capital requirement of 2.5% over and above the minimum base requirement of 7%, for a total of 9.5%.

But the bank needs to build an additional buffer for this figure, as the current capital ratio is subject to the underlying calculation of its risk-weighed assets value and is yet to be finalized by the Basel committee. Also, as regulators authorize a bank’s dividend payout only if they have sufficient capital buffers over mandated levels, it becomes necessary for banks to continue to boost their capital ratios even if they have met the minimum prescribed level. In Deutsche Bank’s case, two additional factors played an important role in its decision to raise billions in fresh capital rather than allow its balance sheet to strengthen gradually through quarterly earnings. Firstly, the continuing weakness in Europe isn’t helping the bank churn out sufficient profits, and secondly, the bank is also wary of potential legal liabilities worth billions which could hit its capital ratios in the near future.

With the bank comfortably meeting its capital targets, we expect it to work towards improving profitability across its business divisions over the coming months, even as it slashes assets under its ‘Non-Core Operations Unit.’ The significantly higher number of outstanding shares, however, will make it more difficult for the bank to boost its dividend payout substantially over the next couple of years. The impact of slower dividend payouts on Deutsche Bank’s share value can be understood by making changes to the chart below which captures the bank’s dividend payout ratio as adjusted for any share repurchases. It should be noted that we have set the dividend payout ratio for 2012 and 2013 to 0% as the adjusted payout ratio is not meaningful.

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Notes:
  1. Deutsche Bank raises capital and reaffirms Strategy 2015+, Deutsche Bank Press Releases, May 18 2014 [↩]
  2. Deutsche Bank fixes subscription price for new shares at EUR 22.50 per share, Deutsche Bank Press Releases, Jun 5 2014 [↩]
  3. Deutsche Bank successfully completes issuance of Additional Tier 1 capital, Deutsche Bank Press Releases, May 20 2014 [↩]