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Deutsche Bank Closes $8.6B Capital Raise, Focused on Growth

German banking giant, Deutsche Bank AGDB successfully completed the issuance of new shares worth €8 billion ($8.6 billion) at €11.65 per share, on Apr 7. The offering recorded 98.9% of 687.5 million new shares subscription from the investors, including applications from various institutional investors.

In a letter to employees published Friday, CEO John Cryan said he will aim for "prudent growth," even as cost reductions continue. While many investors and analysts in Europe were still skeptical about banks, the U.S. investors have been more positive during the capital raising, Cryan noted.

The recent capital raise is the fourth capital infusion by Deutsche Bank since 2010.

To resist another financial meltdown, banks in Europe are under stringent regulatory pressure to maintain a sturdy capital position. Therefore, amid macroeconomic headwinds and a challenging operating environment, the capital raising initiative will enable the bank to meet regulatory requirements, enhance its competitiveness, as well as aid in meeting investment targets across core businesses.

Further, such moves by the bank will negate persistent criticism over the bank's ability to absorb expected losses.

The capital raising is underwritten by a group of banks, including Credit Suisse Group AG CS , Barclays, The Goldman Sachs Group, Inc. GS , BNP Paribas, Commerzbank, HSBC, Morgan Stanley MS and UniCredit.

After Effects

Notably, the capital raise increased Deutsche Bank's Common Equity Tier 1 (CET1) ratio to 14.1% and leverage ratio to 4.1% as of Dec 31, 2016, fully loaded.

Following the capital raise, Deutsche Bank will be focused on its series of additional actions and new financial targets, replacing the ones announced in Oct 2015. One of its latest measures includes the integration of Postbank into the bank's private and commercial banking, and wealth management businesses, instead of disposal of the unit. The bank is also focused on the restructuring of its existing divisions, with focus on three business divisions (Private & Commercial Bank, Deutsche Asset Management and Corporate & Investment Bank), and selling minority stake in Deutsche Asset Management (Deutsche AM) through an initial public offering (IPO) over the next two years.

Deutsche Bank aims to exceed the CET1 ratio above 13% and a leverage ratio of 4.5%. In addition, adjusted costs of about EUR 22 billion are anticipated in 2018 and a further drop to about EUR 21 billion by 2021, both including Postbank's adjusted costs as compared with EUR 24.1 billion in 2016. These actions are likely to result in restructuring and severance costs of about EUR 2 billion, mainly to be incurred through 2017 to 2019.

Additionally, Post-tax RoTE of about 10% in a normalized operating environment, and a competitive dividend payout ratio for fiscal 2018 and thereafter is targeted.

Conclusion

Deutsche Bank's initiative of strengthening its capital position by issuing new shares will result in dilution of the existing ownership. Moreover, though increase in capital will make it less risky, the profit margin will be reduced for the bank as equity investment will rise. Hence, such initiatives taken by the bank might bring down shareholders' confidence.

However, negating such issues, on the brighter side, the solid capital position will better position the bank to meet its investment targets and regulatory requirements. Furthermore, if the planned investment reaps benefits, the excess capital in the future would be returned to shareholders, in turn, boosting their confidence.

Deutsche Bank's shares gained around 20.7% over the last six months compared with 14.8% growth recorded by the Zacks categorized Foreign Banks industry.

At present, Deutsche Bank carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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Credit Suisse Group (CS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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