Deutsche grabs capital from rekindled bank bond market

Deutsche Bank successfully sold €1.25bn of new bonds that count towards its capital buffers on Monday, taking advantage of renewed investor demand for financial institutions’ higher-risk debt following the coronavirus sell-off.

Germany’s largest lender raised the new tier 2 debt, which ranks one notch above the bank’s highest risk additional tier 1 (AT1) bonds, at a yield of 5.7 per cent, making it the first institution to raise bank capital in euros since coronavirus-related lockdowns took hold in March.

The UK’s Royal Bank of Scotland last week reopened the market for the riskier classes of bank debt in sterling, with its own £1bn tier 2 bond sale.

The resumption of new capital deals from European banks indicates that demand has rebounded for such debt, after investors earlier dumped bonds that are more exposed to losses if financial institutions run into serious trouble.

AT1 bonds, which are sometimes termed “contingent convertibles” or cocos because they can be converted into equity in times of stress, were knocked particularly badly when concerns around the impact of Covid-19 first gripped Europe in March. A $1.25bn AT1 bond raised by Deutsche in February fell to about half of its face value a month later.

While that bond is still trading at a deep discount to face value, it has rebounded from its low point to trade at about 71 cents on the dollar and Deutsche drew more than €2.2bn of demand for the new, higher-ranked bonds on Monday.

“We wanted to bring the deal in a strong market environment,” said Dixit Joshi, group treasurer at Deutsche Bank. “We’ve seen a substantial markets rally since March into the end of last week on the back of central bank support and a dissipation of tail risk concerns.”

Mr Joshi added that the deal would allow the bank to “support further business growth” and gives it “additional balance sheet flexibility”.

Deutsche Bank is in the middle of an ambitious turnround plan, having last year embarked on the most radical revamp in its 150-year history, shrinking its underperforming investment bank and planning to cull 18,000 jobs by 2022. The German lender is on course to suffer its sixth consecutive lossmaking year in a row. 

Filippo Alloatti, senior credit analyst at Hermes Investment Management, said that although Deutsche Bank was “not everybody’s cup of tea” and had “chronically underperformed from the revenue generation side”, it had done a “good job in reducing the non core bank and a relatively good job on the cost-cutting programme.”

The type of bonds just issued by Deutsche Bank do not count towards its common equity tier 1 ratio — a key benchmark of balance sheet strength. Deutsche last month said this ratio may temporarily fall below 12.5 per cent of risk-weighted assets, as it was ramping up lending to corporate clients.

That is still well above the minimum required by regulators, but it illustrates the scale of the demand for credit among European companies stung by coronavirus. Deutsche Bank’s loan book expanded to €459bn in the first quarter of 2020, up 6 per cent in a year. Writedowns for non-performing loans were more than three times higher than a year earlier.

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