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.
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The capital increase gives Deutsche firepower for the investment banking drive after a pull-back by Barclays <BARC.L>, UBS <UBSN.VX> 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.
Deutsche shares fell 2.3 percent in early trading, its lowest since April 2013, before recovering to trade down 1.5 percent, in line with European rivals <.SX7P>.
"The thicker capital base should give the bank strength to attack in investment banking - but whether it will be successful depends on market developments and action taken by central banks," said Lutz Wockel from fund manager NordLB Asset Management.
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.
"There was absolutely no reason for any regulator to contact Deutsche Bank on any of its key performance criteria. Both our core tier 1 ratio and our leverage ratio were well in compliance with any regulatory standards," Jain told analysts.
QATARIS DID NOT ASK FOR BOARD SEAT
The new money helps the bank bolster the capital ratios used by regulators as the European Central Bank runs the region's top banks through rigorous checks before it becomes the euro zone's leading banking watchdog in November.
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."
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.
That is closer to the level already held by rivals such as UBS, which last posted a CET1 measure of 13.2 percent. Credit Suisse last posted a ratio of 10.0 percent, which is due to rise to over 16 percent due to regulatory requirements by 2019. Barclays stood at 9.6 percent at end-March but aims for 11 percent by 2016.
"Up to now, Deutsche Bank has done what was necessary but never more," said Stefan Best, managing director at Standard & Poor's. "But the market expects more."
The announcement of the capital hike came only four days ahead of the bank's annual general meeting, where shareholders are likely to register a mixture of displeasure and grudging acceptance over the hefty capital increase.
As it asked for more money, the bank also weakened reform targets it had set out in 2012 as part of a turnaround plan. A post-tax return on equity of 12 percent will come in 2016, the bank said, one year later than previously promised.
Likewise, it now says a cost-income ratio of 65 percent originally envisaged for 2015 will only come in 2016. The ratio was last measured at 77 percent at end-March.
Until now, Deutsche Bank had targeted a core tier 1 equity ratio of 10 percent under the Basel III bank rules in their most stringent form as of March 2015. It had aimed at achieving that mainly by retaining earnings.
"The capital hike has now been taken care of but the goals still seem ambitious," said one top ten investor in the bank who requested anonymity. "You don't buy Deutsche Bank shares these days for the dividend but as a bet on big share-price increases."
In slides for an investor presentation, Deutsche said it expected the pricing of a separate, previously announced hybrid bond worth at least 1.5 billion euros to come before Thursday this week, when management presents its plans to shareholders.
The so-called AT1 bond issue volume is expected to amount to at least 1.5 billion euros.