Deutsche Bank Needs To Raise Much More Capital: SocGen

Deutsche Bank

After Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) added €8 Euro ($10.97 billion) in equity to its balance sheet Sunday, the bank still falls short and the market should be concerned says Societe Generale in a research report published today.

“DBK needs €13bn of equity to improve its fully-loaded leverage ratio to 4.0% by end-2015, which would bring it within touching distance of the bottom of the global I-Banks peer group,” the report said. “We therefore argue that Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK) still needs to raise another €5bn of equity. We believe that the market like us should be concerned should be concerned about a potential for another rights issue, which will therefore cause the share price to react weakly, rather than rebound strongly.”

Deutsche Bank Management target “far to ambitious”

The bank’s management provided new financial targets adjusted for the equity increase, which the Societe Generale report says might be unrealistic. “We urge investors to view these targets as far too ambitious, since they are based on a ‘Strategy 2015+’ business plan that was wholly unrealistic in the first instance in our view,” the report said.  In their note titled “Limping along” the bank outlined why they see Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK)’s earnings nearly 30% below consensus for 2014 and 2015. “Consensus is hoping for a rebound in FICC trading revenues, although we believe signs are that they are still in structural decline.” The report noted the consensus forecasts that say Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK)’s record low cost/income ratios, which are based on the best of both worlds: simultaneous revenue increase and cost decreases, are “simply note achievable” given “a lackluster revenue environment for the business.”

Deutsche Bank simply too expensive, ignore management estimates

The report takes aim at Deutsche Bank AG (USA) (NYSE:DB) (FRA:DBK)’s return on equity forecasts as well given Soc Gen’s lower earnings estimates and the need for additional equity, estimating a 2015 return on equity of only 6.9%, well below management’s optimistic 12% forecast.  Although on paper Deutsche Bank’s relatively low price to book ratio may appear a value at only 0.6 times, the bank sees more downside the upside and re-iterates its sell rating in the stock.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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