Interpreting Middle East Economic News and Analyzing Market Trends

Qatar invests 1.75 billion euros in Deutsche Bank, but does it know what it’s investing in?

Hamad_Bin_Jassim

Investment company owned Sh. Hamad Bin Jassim Al-Thani invests in Deutsche Bank

 

Deutsche Bank has teamed up with a Qatari investment company owned by Sh. Hamad Bin Jassim Al-Thani to help raise 8 billion euros in fresh capital for the bank.  DB claims its for expansion plans, but this comes a year after it was forced to raise 3 billion euros by banking regulators.  Are any alarm bells going off?  If not, then add to this the fact that Qatar’s 1.75 billion euro investment was purchased at a 25-30% discount… are the bells ringing yet?

 

 

Deutsche Bank has asked shareholders for 8 billion euros ($11 billion) in new cash to strengthen its balance sheet ahead of European stress tests and to help fund an expansion in U.S. investment banking as its rivals retreat.

Qatar’s royal family will become a major investor in Germany’s largest bank under the plan, unveiled as Deutsche Bank delayed or diluted most of its 2015 turnaround targets, saying the cost of scandals and new capital rules would remain high.

The capital increase gives Deutsche firepower for the investment banking drive after a pull-back by Barclays, UBS and others left a gap that it aims to fill as Europe’s top debt trader.

But it also underscores how the bank has fallen short of profitability targets and how burdensome fines and settlements and lagging profitability have hampered management’s efforts to fortify capital by retaining earnings.

Deutsche Bank said it would focus on an “accelerated growth program” by hiring top bankers in the United States, investing some 200 million euros to overhaul retail operations in Germany and Europe, and will hire up to 100 advisers to support its biggest corporate clients.

It also aims to expand its wealth management team in the United States and key emerging markets over three years.

The decision to expand comes as the industry reels from a sharp drop in debt and currency trading revenue and new regulatory hurdles diminish returns from many areas of investment banking.

Co-Chief Executive Anshu Jain denied the new capital increase – which came just over a year after another 3 billion euro cash call – was forced upon the bank by regulators.

A stake worth 1.75 billion euros has already been placed with an investment vehicle owned and controlled by Sheikh Hamad Bin Jassim Bin Jabor Al-Thani of Qatar, Deutsche Bank said in a statement on Sunday. It plans to raise another 6.3 billion euros in a rights issue to existing shareholders.

The Qatari investor has not requested a seat on the board, nor was any special fee or protection against a dilution as a result of the rights issue offered to the investor, a source close to the transaction said. “They’re an investor like anyone else.” (except for the fact that they are buying shares at a discount… that’s Qatar’s ‘fee’. Read the Zerohedge article for details)

The capital measures will increase Deutsche Bank’s Common Equity Tier 1 ratio, a measure of a bank’s ability to withstand stress, by approximately 230 basis points, from 9.5 percent at the end of the first quarter of 2014 to 11.8 percent.

Read the full story from Reuters.

 

So bottom line is DB is raising billions to help fund expansion in the US and emerging markets?!  Investment banking revenues are down and dropping, investment banks are laying off people, trading volumes are down and regulatory cost is rising.  It doesn’t make sense, but if Qatar wants to invest in it, then they should at least know what they are investing in:

 

DB Derivative Exposure

Source: Zerohedge

 

Remember those wonderful financial products called ‘derivatives’?  What a wonderful invention.  Did we forget what brought down financial markets in 2008?  It wasn’t the subprime mortgage crisis in the US that caused the Global Financial Crisis.  Financial derivatives off these mortgage-backed securities called CDOs and CDSs brought down Lehman Brothers, AIG and nearly collapsed the entire financial system.  Today, after trillions of dollars in global bailout money was spend bailing out big banks, DB has exposure to derivatives equal to 20 times the entire German GDP!  The derivative problem today is much bigger than it was in 2008.  One small move in the wrong direction and financial markets will collapse… and the bailout money is already gone.

 

I hope Qatar has taken this into consideration before it donated its money to DB.