May.19 - Deutsche Bank says a decision to seek 8 billion euros in new equity capital was driven by uncertainty about the cost of new regulations and the need for funds to expand its investment banking business. Sonia Legg asks if that's a wise move?
Deutsche Bank is going where others fear to tread - it's ploughing money into investment banking. Germany's biggest lender is seeking 8 billion euros in new equity capital. It wants the cash to cover the cost of new regulations and drive investment banking, especially in the United States. Qatar's Royal family has come in as a major new investor and the bank will also sell new shares and debt. But BGC's Mike Ingram says it's a risky strategy. (SOUNDBITE) (English): MIKE INGRAM, MARKET STRATEGIST, BGC, SAYING: "There is a certain amount of skepticism about what the long-term returns of that equity are going to be - that isn't unique to Deutsche Bank - I think that is an issue for banks everywhere in light of the higher capital requirements and the heavier cost structures - the control of risk etc." In recent weeks Barclays and UBS have both announced plans to retreat from investment banking, focussing more on the retail side. Markets largely welcomed that strategy - no surprise then that Deutsche's shares fell 2% after their announcement to their lowest level in more than a year. (SOUNDBITE) (English): MIKE INGRAM, MARKET STRATEGIST, BGC, SAYING: "We are struggling in investment banking right now - particularly in fixed income, currencies and commodities. The amount of capital that is required to make these businesses run mean that your return on equity is, structurally, likely to be very low. It really depends whether you think that what we are going through is cyclical, the downturn in profitability, or whether it is secular. I am in the camp that unfortunately thinks that what we are seeing is a structural downturn in investment banking profitability and that I think is why investors are somewhat skeptical at this point." Deutsche has been hit by numerous regulatory fines and settlements in recent months hampering its ability to retain earnings. . It's first quarter results were down by a third. The new money will help it boost capital ratios and keep ECB regulators off its back. It's also confident investment banking is the right way to go even though some say the current consolidation in the sector is taking place for good reason.