Deutsche to kill two birds with one cash call

By Hugo Dixon
September 9, 2010

By Hugo Dixon and Peter Thal Larsen

Deutsche Bank is killing two birds with one cash call. The official reason for the planned 8-9 billion euro ($10-11 billion) rights issue will be to complete the acquisition of Postbank, the German retail bank. But the fundraising also provides cover for jumping to the front of the queue of German banks that will need to top up their capital as a result of upcoming tighter regulation.

Deutsche was proud of the fact that it was one of few major western banks to avoid a big capital call during the financial crisis. And since then, the bank has argued that it would not raise capital, except to finance acquisitions.
But Josef Ackermann, Deutsche’s chief executive, still cannot crow. The Postbank acquisition was a bad one, at least financially. Bulking up in German retail banking may make sense strategically as it will help reduce Deutsche’s reliance on its investment bank. But Ackermann agreed on a high price for a 62 percent stake in the bank just before Lehman Brothers went bust in September 2008.

What’s more, that multi-stage transaction carried extra liabilities. Deutsche was always going to have to make an offer for the rest of Postbank no later than 2012. The good news is that by moving now, it will be allowed under German takeover rules to offer a rather low price. But that still involves doling out cash. Second, Postbank itself is undercapitalised — just squeaking in above the European Union’s stress test levels in July. So Deutsche will need to fill up its new subsidiary’s coffers too.

Not that Deutsche itself is awash with capital, either. Its core Tier 1 ratio of capital to assets at the end of June was just 7.5 percent, perilously close to the minimum regulators are likely to agree this weekend, and lower than the likes of Credit Suisse and Goldman Sachs. So raising extra cash is helpful here too.

If Deutsche’s spin on its capital-raising will need deconstruction, its tactics can’t be faulted. Assuming the new Basel III global bank capital rules are forthcoming this weekend, they are likely to require other German banks to raise cash. Getting out in front of the pack makes good sense.

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