It has been long said that Deutsche Bank looks undercapitalized, so it was no surprise today when the bank announced plans to raise EUR 2.8 billion of fresh equity capital through private placements. It plans to issue as many as 90 million new shares, which imply an issuance price of EUR 31.11. At the same time, the bank gave a brief overview of its better-than-expected first-quarter earnings, which will be released in more detail tomorrow.
The banks said it earned EUR 1.7 billion (EUR 1.71 per diluted share and a posttax 12% return on equity) in the first quarter, somewhat more than we expected. The biggest driver behind the good results were lower expenses and sharply lower noncore losses compared with the trailing quarter.
We plan to maintain our EUR 38 ($50 per ADR) fair value estimate for the narrow-moat bank for now. The dilution caused by the capital raise reduced our base-case fair value by about EUR 4 , but the impact of this was offset by a slight reduction in our cost projections and a lower weight on our downside scenario, in which the bank must raise additional capital.
While we see the capital measures announced today as good news, we’re not convinced that they’re enough, and we’re maintaining a 15% weight on our downside scenario. In the past, we had expected Deutsche Bank to raise EUR 10 billion in order to increase its tangible common equity ratio to 4.0%, just below the 5.0%-7.0% level we’d prefer to see. We think the measures announced today will increase Deutsche Bank’s TCE ratio to about 2.9% and will allow the bank to increase its ratio to a still fairly low 3.25% by 2016.
An increase in revenue in corporate banking and securities led the group’s results, as the bank benefited from recent Central Bank quantitative easing. Pretax income was EUR 662 million. Sales and trading revenue, up 15% over the trailing quarter, reached its highest level ever and foreign exchange saw record volume. Origination and advisory revenue was up 31% over the trailing quarter as the bank gained share in advisory and as equity origination markets picked up. Despite this, the unit’s results were unsatisfactory, in our opinion–the cost/income ratio was 78% and pretax return on equity was just 10%.
Results in global transaction banking were better and pretax income increased 10% sequentially to EUR 340 million. Revenue increased 6% from the year-ago quarter and 3% from the trailing quarter as volume increased. The unit’s cost/income ratio remained stable with the trailing quarter at 63% and the capital-light unit reported a 44% pretax return on equity.