A reversal on a shareholder rights issue would be a bitter pill for Anshu Jain and Jürgen Fitschen to swallow. Deutsche Bank’s co-chief executives vowed in September to strengthen the bank’s finances without tapping shareholders. But American capital rules, noncore losses and a looming Libor settlement have raised the ante.
Deutsche Bank goes into 2013 lagging behind its peers on capital. True, it should narrow the gap by the end of March, when it expects to have an 8 percent core Tier 1 ratio under Basel III. But investors want big universal banks with sizable exposure to capital markets to be at around 10 percent as soon as practicable. A rights issue of 5 billion euros ($6.5 billion) would propel the bank’s ratio above 9 percent by the spring. That would put it on a par with better capitalized rivals like UBS.
While Mr. Jain and Mr. Fitschen want to build capital organically, there are good reasons to accelerate the process. For starters, Deutsche Bank may be unable to shift enough capital to the United States to support its Taunus subsidiary. Based on a 3 percent ratio of Tier 1 capital to assets, Taunus had an equity shortfall at the end of 2011 of $16.2 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 the German regulator, BaFin, would be more likely to approve a transfer if Deutsche Bank’s capital position were stronger.
Then there is the London interbank offered rate. In September, the bank 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 Bank may be far less culpable, if it is reprimanded at all. Still, a prudent approach to the fine calls for additional provision.
Finally, Deutsche Bank’s noncore unit could conceivably impose heavy losses in excess of the recurring quarterly charge of 500 million euros that management foresees.
Heads usually roll when management executes an about-face of this kind. But Credit Suisse‘s chief executive, Brady W. Dougan, survived a U-turn over capital in July, albeit with the support of some big anchor investors. And Mr. Jain and Mr. Fitschen could offer their own 2012 bonuses as a sacrificial salve. Besides, bank shares are on a tear as a result of the relaxation of Basel liquidity rules. A rights issue now might be favorably received.
Dominic Elliott is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.