Deutsche Bank's (DB) cash call is getting a fairly solid reception from investors Monday and could mark a turning point in perception for the European banking sector. But it's also raising questions as to who might be next in line to tap the markets for new capital.
Germany's largest lender unveiled a series of measures over the weekend intended to steady the ship, including an €8 billion ($8.5 billion) rights issue, cost cuts, new financial targets and the planned partial IPO of its Deutsche Asset Management arm.
Given that the bank is asking investors to stump up nearly a third of its market cap -- even CEO John Cryan called it a "heavy" rights issue -- the reaction has been supportive: shares in the bank are down 5.7% in Frankfurt at €18.01 but are still some 40% to the good since the November U.S. Presidential elections.
What remains to be seen, however, is whether the rising Deutsche Bank tide can lift the proverbial European banking boats after a somewhat setback year in 2016. Torturing the metaphor further, Deutsche has now set a high-water mark of 14.1% in terms of its new core equity tier 1 (CET1) ratio -- a measure of financial strength -- that could test the resilience of its European rivals.
Credit Suisse (CS) shares were trading 3.8% lower by mid-day in London against a 0.83% slip for the Stoxx 600 Europe Banks Index, as the Zurich-based lender has been subject to the same kind of scrutiny that Deutsche Bank has endured for the past two years. Last December, the Swiss bank brokered its settlement with the U.S. Department of Justice for $5.3 billion on the same day Deutsche cut a deal for $7.2 billion.
But Credit Suisse CEO Tidjane Thiam said last month that even with a CET1 ratio of 11.6% at the end of last year and a fourth quarter loss of 1.9 billion Swiss francs ($1.88 billion), he was in a "more comfortable position from which to assess our capital options" and would instead look at a "broad range of options" alongside the idea of the partial sale of it domestic Swiss business.
Mind you, that's almost exactly what Cryan said earlier this year when asked if he was considering an asset management IPO: "it's a very lovely steady stream of predictable profits and revenues for us, so we like it very much, so we'll keep that."
BNP Paribas SA (BNPQY) , France's largest bank, might be another firm in the market's cross-hairs, given the relatively moribund 2017 outlook that followed its weaker-than-expected fourth quarter earnings. It's targeting a CET1 ratio of 12% by 2020, a figure that was already light of the European "big bank" average and now looks rather limp when compared to Deutsche Bank's new pro-forma benchmark.
Low interest rates and a sluggish domestic economy -- neither of which are likely to change anytime soon -- as well as a pledge to invested €3 billion in new technology might make that figure look even less spectacular.
Facts on the ground change quickly; the truth is that Europe's biggest banks, while improving, still face myriad challenges.
The biggest 20 European lenders generated only €33 billion in net income last year, nearly 5x shy of the record $172 billion bottom line put together by the U.S. banking sector, which is actually smaller in size. European banks also saw revenues fall faster than expenses last year. Even dumping assets didn't really change the overall risk picture on the continent: the average CET1 ratio of Europe's biggest banks was largely unchanged at 12.7%.
And the problems don't stop there.
The European Central Bank is likely to maintain its loose monetary stance for most of this year, including negative rates, even as the Federal Reserve tightens policy later this month. The ECB's stance is hampering bank profitability. European lenders are also sitting on more than €1.0 trillion in bad loans, according to European Banking Authority data, and will likely need to raise a collective €158.7 billion by 2019 to meet new rules on funding ratios.
But investor reaction to Deutsche Bank's change in direction could suggest some good value in European banking stocks as the economy recovers.
Risk-weighted assets at the 20 biggest banks are at their lowest levels (€6.5 trillion) since the financial crisis and big European lenders looking to the (now hot) U.S. market to energise earnings might have an easier time of it, owing to the anticipated roll-back of Dodd-Frank regulations.
In fact, all of the six European banks that the Fed will asses under existing Dodd-Frank rules -- Barclays (BCS) , Credit Suisse, Deutsche, UBS (UBS) and HSBC (HSBC) -- are "well placed from a capital perspective for the stress tests", according to DBRS analyst Jack Deegan.