Deutsche Bank surges amid new capital plan
The German giant will raise billions in fresh equity after its best quarter in two years.
The rally in the bank's share price immediately after it announced a plan that dilutes shareholders' interests may look counter-intuitive, but is justified, as the potential risk-reduction benefits stemming from the new capital structure far outweigh this dilutive effect.
To put things in perspective, the new shares that Deutsche Bank intends to place privately with institutional investors represent under 10% of the bank's outstanding shares, but the equity capital it raises in this manner will push its Basel III Core Tier 1 capital ratio sharply, from 8.8% to about 9.5%, making it one of the best capitalized global financial institution.
And while the capital plan eclipsed Q1 performance figures, there were some noteworthy improvements for Deutsche Bank across its business divisions. Most notably, the bank's operating expenses fell to the lowest value since Q3 2011, a notable achievement considering the fact that banks report high quarterly expenses in the first quarter of a year due to additional compensation-related expenses like bonuses. Lower provisions for the period and a strong capital market performance also played an important part in raising income figures this time around.
Margins improved across the board
Going by the numbers reported by Deutsche Bank this quarter, it looks like the cost-efficiency measures envisioned as a part of Strategy 2015+ have started kicking in, as the bank's Q1 2013 non-interest expenses of €6.6 billion ($8.7 billion) were the lowest since the €5.9 billion ($7.8 billion) figure, reported in Q3 2011. The general and administrative expenses have seen the biggest improvement – falling to €2.8 billion ($3.7 billion) from around €3.2 billion ($4.2 billion), for each of the first three quarters of 2012. This compares to the €5.3 billion ($7 billion) in general and administrative charges for Q4 2012, which however, included heavy one-time goodwill impairment charge and litigation-related costs.
The impact of reduced costs was seen most on the investment banking business, which achieved pre-tax incomes of €1.85 billion ($2.44 billion) on revenues of €4.6 billion ($6.1 billion) for a respectable operating margin of 40% this quarter.
Debt & equity origination activities also saw a boost
Deutsche Bank reported a 20% improvement in fees generated by its debt origination business for the quarter compared to the figure for Q1 2012 as well as Q4 2012. Fueled by an increasing demand for high-yield investments by investors across the globe, the debt capital market grew by nearly 13% for the quarter, and Deutsche Bank capitalized on its strength in the market to pocket a tidy sum of €455 million ($600 million) as debt origination fees. We had highlighted the increase in these fees for all global investment banks in an article on Trefis.
As the equity capital markets did not see a similar high growth, equity origination revenues for Deutsche Bank increased marginally in Q1 to €152 million ($200 million). It must be mentioned here that this figure is the highest for the bank since Q2 2011 -- when Europe's debt got out of hand, eroding investor confidence in equity markets for quite some time after that.
We stick to our Trefis $54 price estimate for Deutsche Bank's stock, which is a good 15% ahead of the share's current market price.
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Shares fell 9 percent during the quarter, which offers a compelling entry price now.
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