By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
“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 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