With core Tier-1 now depleted to just 5.6 per cent (and with further share price declines, likely to drop further) the universal message from the sector analysts is that more capital raising is inevitable.
And given what happened to Commerzbank last week, we don’t think the German government taking a highly dilutive stake is out of the question either.
Analysts thoughts below (latest to be added as we receive them):
From Cazenove:
Deutsche Bank [DBK GY; DBKGn.DE], €22.7, UNDERPERFORM, Sector NEUTRAL
The company has warned for Q4: Net loss €4.8bn reflecting “exceptional market conditions” which “severly impacted” credit trading, equity derivatives and equity prop (Caz est -€1bn) Tier 1 “in the region of 10%” including a 50c dividend accrual (Caz est. 10.6%, zero dividend accrual) Leverage reduced vs Q3 on the company’s target definition (US GAAP assets) but, under IFRS, balance sheet reductions offset by higher positive derivative market values. Leveraged loan balances reduced to < €1bn from €11.9bn and commercial real estate to <€3bn from €8.4bn The result includes "corrective measures" with other to follow in 2009
Caz comment
The loss is significantly larger than we had allowed for although it is not clear what role restructuring and de-risking measures played. The main surprise is the resilience of tier 1 against what appears to be at best a flat risk-asset outcome. This suggests the company's recent contingency measures (rebooking of contingent capital, treasury share sale etc) have had a somewhat larger effect than we anticipated. Nevertheless, with market conditions showing few signs of easing, the threats to capital remain meaningful.
From RBS:
Deutsche Bank (Key Sell)
Massive profit warning of €4.8bn loss vs our expectations of a small loss. Key drivers are:
1) Trading losses (prop trading/equity derivatives/credit trading)
2) Monoline charges (refer to our Hook, Monoline & Sinker report on Dec 18th, attached) where we highlighted DBK/BARC as banks most exposed
3) Reorganisation charges
4) Impairment charges on DWS Scudder/money market hits.
Reduction of CRE assets, most likely to the loan book, reducing exposure from c. EUR8.3bn to EUR3bn. Lev loan exposure also cut though due to exit from large unfunded BCE position.
Derivative unwinds see balance sheet deleverage of c. EUR300bn
CAPITAL RAISING risk. Q4 loss of €4.8bn reduction of 1.5% to core T1, which was already relatvely low at 7.1% (so now stands at 5.6%). We see 8.5% as an appropriate capital target level, and equity issuance as an inevitability. German Govt involvement cannot be ruled out – reiterate
SELL.
And predating today’s revelations, this prescient note from JPM on Monday (emphasis ours):
We would remain cautious as DB remains a pure IB play in our view, which we would avoid in a declining flow revenue environment in 2009, and continue to prefer private banking exposure.
Highest gearing to IB earnings, and fixed income in particular: DB generates 51% of pretax profits 2010E from the Investment Bank and only limited 8% from private banking exposure (incl. asset management) vs. Swiss peers at 41%. Deutsche Bank also has the highest exposure to fixed income accounting for 51% of total CB&S revenues and 28% of group revenues in 2007.
NAV at risk 1: Deutsche Bank’s capital ratios look tight relative to IB peers with Tier I ratio at estimated 10% YE 08E, vs. 13.2% for Credit Suisse and 11.5% for UBS, with a more volatile business mix due to the higher gearing to investment banking activities, secondly, Deutsche Bank operates with material balance sheet leverage at 34x end Q3 08 (per DB target definition) compared to US investment banks at 17x.
Related links:
Deutsche’s prop loss – FT Alphaville
Deutsche Bank expects full-year loss – FT