No pain, no Jain?

Rights issue rethink could ease sting for Deutsche

A rights issue U-turn would be a bitter bill for Anshu Jain and Juergen Fitschen to swallow. Deutsche Bank’s co-chief executives vowed in September to strengthen the bank’s finances without tapping shareholders. But US capital rules, non-core losses and a looming Libor settlement have upped the ante.

Deutsche goes into 2013 lagging its peers on capital. True, it should narrow the gap by the end of March, when it expects to have an eight per cent core Tier 1 ratio under Basel-III. But investors want big universal banks with sizeable capital markets exposure to be around 10 per cent as soon as practicable. A euro 5 billion rights issue would propel Deutsche’s ratio above nine per cent by the spring. That would put the bank on a par with better capitalised rivals like UBS.

While Jain and Fitschen want to build capital organically, there are good reasons to accelerate. For starters, Deutsche may be unable to shift enough capital to the United States to support its Taunus subsidiary. Based on a three per cent ratio of Tier 1 capital to assets, Taunus had an equity shortfall at the end of 2011 of $16.2 billion (euro 12.4 billion). Foreign banks may not be required to make up their shortfalls in the United States until July 2015, but regulators can be fickle. And, Germany’s BaFin would be more likely to approve a transfer if Deutsche’s capital position was stronger.

Then there’s Libor. In September, Deutsche put aside a sum for a possible settlement based solely on Barclays’ $450 million settlement. That was before UBS received a $1.5-billion fine. UBS was an egregious offender and Deutsche may be far less culpable, if it is reprimanded at all. Still, a prudent approach to the fine calls for additional provision.

Finally, Deutsche’s non-core unit could conceivably impose heavy losses in excess of the recurring quarterly euro 500 million charge that management foresees.

Heads usually roll when management executes a volte-face of this kind. But Credit Suisse boss Brady Dougan survived a U-turn over capital in July, albeit with the support of some big anchor investors. And, Jain and Fitschen could offer their own 2012 bonuses as a sacrificial salve. Besides, bank shares are on a tear following the relaxation of Basel liquidity rules. A rights issue now might be favourably received.