“One of the hardest things to do is to shrink your way to profitability.”
Let me say this upfront: When an at-risk too-big-to-fail bank raises fresh capital from investors, it’s a great thing for affected taxpayers. When push comes to shove, every dollar thus extracted from investors lowers the burden on taxpayers.
Since the Financial Crisis, Deutsche Bank has been raising capital in large waves — $20 billion so far. And now, its new efforts to raise another $8.5 billion by selling shares would bring the total to $28.5 billion, and it would nicely dilute existing shareholders further, and it would be a great thing for affected taxpayers.
Not that taxpayers would be off the hook: The assets on Deutsche Bank’s opaque balance sheet equal 58% of Germany’s GDP. That $8.5 billion in new capital would nevertheless lower both the risks for affected taxpayers. So I’m all for it. But I just love the way they’re going about doing it.
So Deutsche Bank CEO John Cryan came out this week to persuade existing shareholders (not taxpayers) that diluting their stakes by selling $8.5 billion of new shares would be a good thing for them. If they wanted to maintain their stakes, they could buy into the offer. He supported this with a new emergency turnaround plan. No one can remember how many emergency turnaround plans Deutsche Bank has been trotting out over the years.
The new plan calls for boosting the retail business in Germany, and so it abandoned old plans to sell Postbank. It’s going to compete with largely state-owned cooperative banks. It’s going to be just as tough as it was before it had decided in one of its prior turnaround plans to cut its exposure to the German retail business. And it wants to strengthen its global investment bank, after it had decided to shrink it in one of the prior plans.
“The capital raising buys them time,” Moodys’ Peter Nerby told Reuters. “You can go along their plan point by point and the main thing you can tick off is capital and derisking. One of the hardest things to do is to shrink your way to profitability.”
But maybe because throwing more money at it is better than losing what they have already sunk into it, Deutsche Bank’s three largest investors who together own nearly 20% – a group of Qatari funds controlled by former Prime Minister Sheikh Hamad bin Jassim al-Thani, US fund manager Blackrock, and China’s HNA Group – are likely to back the capital hike, “people familiar with the matter” told Reuters.
One of the other options would be that Deutsche Bank might not make it, and their existing equity stakes would dissolve in financial smoke.
The Qatari funds, which own nearly 10%, have been on board with a capital raise since October last year and had expressed their willingness to buy more shares to protect their stake if the bank were to raise more capital. Today Reuters reported:
That stance has not changed since, and an official in Sheikh Hamad’s office confirmed that the former prime minister had met with Deutsche Bank in recent weeks, but declined to comment.
Blackrock, which owns nearly 6% of Deutsche Bank in its funds, is, according to Reuters “likely to take up its rights, partly because many of its funds are bound to do so because of the lender’s stock market weighting.”
HNA Group, a conglomerate with big interests in airlines and a passion for global acquisitions, owns 3% of Deutsche Bank and is also willing to buy more shares to protect its stake from dilution, “a person familiar with its thinking” told Reuters.
All this is somewhat ironic. On September 26, 2016, when Deutsche Bank shares were threatening to drop into the single digits, it denied rumors that it would sell shares and dilute the already beaten-up shareholders further. That question “is currently not on the agenda,” it said at the time.
But the world changes in five months. Full-fledged support from the ECB, jawboning from the German government, and the Qatari funds’ much hyped willingness to buy more shares helped. Wall Street was looking for a buying opportunity. And of course the outgoing US administration desperately wanted to settle the residential-mortgage-backed-securities case. The Department of Justice had initially asked for $14 billion in fines, but then in the last days of its reign gave Deutsche Bank a huge incentive and finally settled for about half, $7.2 billion.
All these efforts in unison bore fruit. Its shares have since soared 75% to €17.94 and its infamous CoCo bonds – contingent convertible perpetual bonds that are designed to be “bailed in” in case of trouble before taxpayers get to foot the bill – have regained life, with the 6% bonds jumping 30% to 95.22 cents on the euro. And the support from the Big Three shareholders has pumped up shares 2.6% today. If they had turned their backs, no telling what would have happened. That’s why they practically have to tag along – just to protect their investments.
When prices are high (or at least off the floor), that’s the time to sell shares, raise capital, and dilute shareholders, as it had done before in 2010, 2013, and 2014, only to see its shares fall afterwards all over again to ever lower lows as the nagging details of reality kept catching up with it.
So how long before the stock market hits the wall? Read… This is Worse than Before the Last Three Crashes
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Deutsche Bank were involved in “shorting” the airlines whose aircraft crashed into the Twin Towers and Pentagon on 9-11. If it wasn`t in the Wall St Cartel it bwould be “shorted” to destruction because it is bankrupt.
The bond market will decide.
The US bond market curve has now inverted.
The US 10 year Treasury is solidly above 2.5% currently at 2.598%
Once it hits 3.0% or more equities will tank along with Deutsche bank
Now the Fed is going to raise rates. There have been absolutely zero times in history that the Fed has begun an interest rate hiking campaign, that has not eventually led to a negative outcome.
The German bank may have a very short respite!
“The US bond market curve has now inverted.”
I saw this claim the other day, and I don’t get it.
2 year – 1.36%
5 year – 2.10%
10 year – 2.58%
30 year – 3.17%
The yield curve is flattening, but it’s not inverted (yet).
I’m not sure if you care about Bill Gross, but, fwiw, he ways we’re on the precipice.
The rally in European banking stocks over the past six months has been one of the most baffling phenomena I’ve observed in my life.
Nobody seems to understand exactly what sustained it nor what rumors might have propelled shares to recent values: after all Deutsche Bank is seeking to raise €8 billion in fresh capital and Unicredit a massive €13 billion. Shareholders are going to get hit no matter what.
I understand the trick of sending up prices first and then to hit shareholders (at least those who didn’t sell the rally) on the head with a brick, but this has done so many times and so recently you’d expect people to wise up to the deal, count their lucky stars and sell while they can. But no.
People around here are “invested” up to their gills in banking stocks and bonds. The mantra has been the same since my youth: “Banks cannot go bankrupt”. But their stocks can end up in the penny department and they can restructure their debt. It happened before and will happen again, for the simple reason fundamentals haven’t changed.
Banking stocks (like junk bonds, precious metals and everything else) have their place in an investment portfolio, once one understands the dynamics: they must be bought at or near bottom during one of the many post-2010 panics and held for several months, then dumped at a profit before people notice the bank is as rotten as it was before. They are a purely speculative asset class these days and as such should only be handled by investors with the experience and/or the stomach for such risks. People looking for a steady long term dividend and stable valuations had better not apply.
Not only that banks cannot go bankrupt, but it seems they cannot even have one quarterly loss. Where I live, they have been increasing fees, and quarterly profits on a regular basis. In fee increases, it’s a race to the top.
If I’m correct, you are in Canada. Canadian bank are a universe of their own. They have so many charges, fleece the poor customers in so many ways. I think even Feds should learn how to fleece people from the Canadian banks.
Pension fund ‘investors’ are captives, they don’t make the decisions as to what the fund managers are going to buy. Thus the ‘Harry in your pocket’, the mysterious levitation, the fund managers are in cahoots with the …. well it’s pretty obvious after a while.
Pension fund ‘investors’ are in a sealed train.
The derivatives market is bigger than ever, meaning the banks are more inter-connected than ever.
DB goes down, they all go down.
US and UK tax payers will be on the line too.
“DB goes down, they all go down.”
That is still a serious possibility.
DB is not TBTF it is TB to be allowed TF, CURRENTLY.
The decision has been made, to allow more illegal state aid in the Italian banking sponge.
Hence it is no longer currently necessary, for the plan that a Northern bank must fail before the massacre of the Italian banking sector takes place.
As the Massacre of the insolvent italian banking sector, is again back on hold, due to another EU kick the can.
DB had best pull its sock’s up, as when the italian banking crisis comes around again. The northern sacrifice plan, will be trotted out again,. If thing’s at DB have not improved, it will again be back in the role of northern sacrificial lamb.
No, no, no. The Central Banks (notably ECB in this case) have and continue to prop up the big banks. This is all a charade. When time comes to issue shares, they WILL be bought and at a stable price. The Central Banks will ensure this.
Why is there so much inflation in assets? Because the CBs are creating digital money out of thin air to support a whole variety of causes.
DB is up again today, not down.
It’s not clear what’s to like about this capital raise, why can’t people speak plainly, is beating around the bush aka pc?
This bank should be allowed to fail just like so many others that were rescued instead, the world doesn’t need them and will continue on just fine. Let the little guy buy the assets on the cheap.
This is a wealth extraction theft in progress.
“Deutsche Bank’s three largest investors who together own nearly 20% – a group of Qatari funds controlled by former Prime Minister Sheikh Hamad bin Jassim al-Thani, US fund manager Blackrock, and China’s HNA Group”
All decent hard working folks, who would not have any ulterior motive to invest in DB.
You do realize the same Qataris bought shares in Barklays using money loaned to them by Barklays. Illegal yes, but regulators looked the other way. Same happening with DB? My guess is some other more circuitous scheme is in play here but same idea. Using newly created credit money to purchase assets is certainly the order of the day.
This is standard European practice.
The only difference here.
Is that it is being done by a German bank, to big, informed, foreign investors.
Not by Italian bank’s, to small retail borrowers, under duress.
The duress being “you don’t borrow X and buy our bond’s/Shares. We don’t lend you X, to buy what you want, that you have security for, and the ability to pay”.