Jain reaction

Deutsche capital capitulation goes just far enough

Anshu Jain and Juergen Fitschen have seen sense. Deutsche Bank's co-chief executives have ditched their go-slow capital rebuild in favour of a plan to raise euro 4.8 billion ($6.2 billion) in new shares and subordinated debt. The move tackles a possible capital hole in the German bank's US business. But as capital hikes go, it's not shock and awe, and the U-turn dents management credibility. With Libor still hanging, Deutsche isn't out of the woods.

The bank is first raising euro 2.8 billion of equity through a share placing. A rights issue would have given existing shareholders some protection from the dilution that goes with the sale of new shares. But at least placings raise equity quickly. This should bump the bank's Tier-1 Basel III capital ratio up to 9.5 per cent, ending Deutsche's capital laggard status.

A euro 2-billion subordinated debt issue is scheduled for later this year. That looks to be squarely aimed at meeting leverage ratio requirements for Deutsche's US business, without a too-chunky transfer of capital from Germany leaving it exposed at home.

Taken together, the moves should be just about enough to meet the needs of Deutsche's undercapitalised and overlevered American operation. Morgan Stanley reckoned in March that Deutsche needed between $7 billion and $9 billion of capital by July 2015, when new rules kick in. But Deutsche organically built an additional $1.1 billion of capital over the last quarter. Factor that in and Deutsche should just squeak over the line.

Still, there's little margin for error. Reserves set aside for a Libor settlement may rise. Norwegian investor Alexander Vik is also suing Deutsche over failed foreign exchange transactions between 2006 and 2008 - a case that has raised questions about the bank's risk management before the crisis.

Having so vociferously championed a strategy of building capital through retained earnings over time, it silly for Deutsche to describe its U-turn as simply "accelerating our progress". Jain and Fitschen could and should have raised equity when they unveiled their plan to turn the bank around on September 11. Fortunately for them, Deutsche's shares have barely budged since then. Deutsche's bosses can get away with this for now. But Jain in particular, having led the investment bank before stepping up to co-run the group, is still on the spot.