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Deutsche headed for rights issue as litigation eats capital, Mediobanca says

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Deutsche headed for rights issue as litigation eats capital, Mediobanca says

will probably beforced to carry out a rights issue as the company's struggles to meet itscapital targets are exacerbated by rising litigation costs, Mediobanca analystssaid.

Usingconsensus earnings estimates and assuming only €3.3 billion in litigationcosts, the bank is heading for a capital hole of between €4 billion and €5billion in 2018, analysts Adam Terelak and Alain Tchibozo said in a Sept. 26research note. Deutsche's shares slid more than 7.5% following reportedcomments by German Chancellor Angela Merkel over the weekend that there wouldbe no state aid for the lender.

Thebank will come up short of an ECB supervisory review and evaluation processtarget of a fully loaded common equity Tier 1 ratio of 12.25% by January 2019,Mediobanca said.

Deutschesaid Sept. 15 that the U.S. Department of Justice was $14 billion to settle civilclaims related to the misselling of mortgage-backed securities, although itpromised to bargain the eventual payment down.

Thebank faces other potential litigation charges from matters includinginvestigations into alleged foreign exchange market rigging and moneylaundering, Mediobanca noted, adding that the rights issue, while necessary,would not be able to go ahead until there was more clarity on the eventualbill. Other uncertainty hangs over the impact of so-called "Basel IV"regulatory changes on its regulatory capital needs and whether it can unlockcapital by selling its Postbank unit.

"Moreclarity is needed before the rights issue can be properly sized and as a resultwe expect the Deutsche capital story to drag on for some time," theanalysts said.

DeutscheBank's shares now trade at about 28% of tangible book value, down from 62% ayear ago. Fears over the bank's ability to pay coupons on its Additional Tier 1bonds without breaching regulatory capital levels sent tremors through bondmarkets at the beginning of the year.