Deutsche may not escape state grip in forced recap

October 14, 2011

By Margaret Doyle
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Deutsche Bank is in a bind. The German lender needs to find around 9 billion euros of capital to pass Europe’s latest bank stress test, according to insiders. The German government could put up the cash. But with Deutsche’s market capitalisation at a depressed 26 billion euros, a state-backed recap would see Berlin owning more than a quarter of the bank — raising the prospect of politicians interfering with bonuses, dividends and lending.

So it is unsurprising that Josef Ackermann, Deutsche’s outgoing chief executive, says the bank will do what it can to avoid a forced recap. But if the lender has to raise the money, its options for doing so privately are limited. Market anxiety means it’s unlikely that existing shareholders will support a large capital hike.

One option is to copy the Barclays three step approach — sell businesses, solicit capital from sovereign wealth funds, and cut the dividend. The British bank in 2008 avoided a government recapitalisation by raising 7 billion pounds from Middle Eastern investors. It also suspended dividend payments for a year and then sold BGI, its fund management arm, for $13.5 billion.

Deutsche could offload DWS, its retail asset manager. On a conservative multiple of 1.5 percent of its 172 billion euros under management, a sale could bring in as much as 2.6 billion euros.

Ackermann could also try to tap Middle Eastern sovereign wealth funds. In May, Deutsche got approval to issue stock to new investors without giving existing shareholders the right to subscribe. Placing the 90 million shares in question at a 5 percent discount to the current share price could raise around 2.4 billion euros. Scrapping two years’ worth of dividend payments could save a further 1.4 billion euros.

But even if it did all these things, Deutsche would still be at least 2.6 billion euros short of its capital target. Of course, the bank could boost its ratio further by shrinking its risk-weighted assets. But Deutsche already has ambitious plans to shrink its RWAs by 90 billion euros over the next two years.

Further shrinkage would affect lending decisions, denting already anaemic economic growth. Ackermann will be hoping this fear will prompt politicians to rethink. He doesn’t have many other options for avoiding state involvement.

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