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Banking

Deutsche Bank set to raise capital again

A year ago, co-CEO Anshu Jain declared that Deutsche Bank's hunger for capital was over. But in an effort to fix up its balance sheet ahead of an ECB stress test, Germany's largest bank is once again raising money.

Deutsche Bank raises money from Qatari royals

Deutsche Bank's recapitalization effort is set to inject some 8 billion euros ($11 billion) into the German lender's coffers.

The two-phase plan involves first raising 1.75 billion euros from Paramount Holdings Services, an investment vehicle owned by Sheikh Hamad bin Jassim bin Jabr Al-Thani of the Qatari royal family.

The second step, set to begin on June 24, will see around 300 million shares sold to other investors to raise the remaining 6.3 billion euros.

Analysts believe the bank's efforts to boost its capital is linked to an upcoming stress test by the European Banking Authority. Deutsche Bank's capital ratio took a hit after poor quarterly results and intensified risk assessments, falling to below 10 percent and prompting warnings from rating agencies about the institution's capital position. This, in turn, pushed the bank to act.

"Room to breathe"

But some experts see it differently. Philipp Häßler, an analyst at Equinet Bank in Frankfurt, says Deutsche Bank would not have been in any danger of failing the stress test even without fresh money.

"When the capital ratios of Deutsche Bank and its competitors are compared, investors can see that Deutsche Bank's ratio is 9.5 percent, while the figure for some of its competitors stands well above 10 percent," Häßler told DW.

After the issuance of new shares, equity should make up around 12 percent of the bank's total assets. At the same time, the institution will reach its maximum debt ratio provisions. This so-called "leverage ratio" stood at 2.6 percent at the end of 2013.

By comparison, the failed US investment bank Lehman Brothers had a similar debt-to-equity ratio at the time of its bankruptcy. Deutsche Bank's ratio is set to exceed the minimum requirement of 3 percent after the massive capital increase and would translate into 33 euros of debt for each euro of equity.

Nevertheless, Hans-Peter Burghof, economics professor at Germany's Hohenheim University, believes that the fresh capital will provide the bank with room to breathe. It may, however, encounter resistance among shareholders.

"One may not expect shareholders to support such a decision," Burghof said. "A capital raise is not something they would like to have as it would reduce the value of their equity holdings."

Legal problems remain

Such a move is known as stock dilution. If a thin capital base was the only problem plaguing Deutsche Bank, shareholders could exhale a sign of relief despite the dilution. But this is not the case. Shareholders have repeatedly been shocked by new revelations related to past sins that have steered the bank into troubled legal waters.

"Be it the allegations surrounding gold price manipulation or foreign currency manipulation, there are still risks that cost the bank more money," said Häßler, the Equinet analyst.

Deutsche Bank had to set aside approximately 3 billion euros for litigation purposes in 2013 and analysts believe it may have to allocate a similar amount this year.

An accurate assessment is difficult "as many of these disputes end up with a kind of compromise in which the institution pays a certain amount of money," said Burghof, who added that "the amount is decided randomly in each case."

Despite the problems, the bank will still ask its shareholders to approve a doubling of the legally established limit on bonus payments at an upcoming annual general meeting. Otherwise, the base salary will be doubled.

Even on this point, the shareholders will have more to swallow than to decide.

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