From famine to feast

Deutsche is on the offensive in $11-billion share sale

Deutsche Bank has done a huge but welcome u-turn. Having long defended its strategy of rebuilding capital organically, Germany's biggest lender is launching a mammoth euro 8-billion ($11 billion) capital hike. That imposes a heavy burden on shareholders. Investors need to believe that the new money will help Deutsche ram home its advantage in investment banking now that European rival Barclays is pulling back.

The number is big enough to silence Deutsche's capital critics. It is hard to see the bank failing euro zone stress tests now. After the cash call, Deutsche will have a buffer of more than euro 4 billion above its long-term core tier 1 ratio target, even accounting for about euro 2 billion of capital needed for a new rule governing valuation of illiquid assets. The bank's leverage ratio rises to 3.1 per cent on a common equity basis alone. That provides an insurance policy if the European Central Bank turns out be an especially exacting regulator, or if a pending settlement on Deutsche's involvement in the Libor scandal proves more costly than allowed for.

Of the total, euro 1.75 billion is coming from an investment vehicle controlled by Qatar's Sheikh Hamad Bin Jassim Bin Jabor Al-Thani. The sight of one investor getting special treatment looks awkward and undemocratic. But the terms of the placing are not that generous - the 29.20 euros per share in-price represents a discount of less than 2.5 per cent to the closing price on May 16, factoring in the lack of entitlement to recently declared dividends. So, the placing helps reduce the size of the more dilutive rights issue.

Deutsche's decision to go large is not all about defensiveness. It also smacks of opportunism. Barclays has just radically reshaped its strategy to pull back in many areas in which it traditionally competed with Deutsche. Rather than slash its balance sheet in sympathy with its British rival, Deutsche has clearly decided that strategy should dictate capital and not vice versa.

The new difficulty for co-chief executives Anshu Jain and Juergen Fitschen is that the bank will have to work an awful lot harder to deliver a satisfactory performance for shareholders who demand considerably higher returns for backing risky capital market activities. But Deutsche is now delaying returns targets: three of the bank's four business lines are projected to make lower pre-tax profit or returns in 2015 than previously. New investments in retail banking, wealth management and M&A will take time to pay off.

Berlin will be relieved that Germany's national champion is at last decisively fixing its balance sheet. But shareholders still need investment banking to rebound, and Deutsche to benefit disproportionately in that recovery, to be rewarded for funding this needed capital repair.