AT1 success for DB but shareholders will have to wait
Deutsche Bank’s ability to issue a new additional tier one bond illustrates the lesson of investing in European banks over recent years: bet on bonds, not equity.
Deutsche’s AT1 this week was the first it has issued in more than five years.
The bank’s outstanding AT1s have traded with more volatility than most, as investors have worried about its ability to meet the special criteria needed to service the coupons.
But the rules on AT1 distributions were eased last year, meaning Deutsche could take chunky charges on its P&L without hindering its ability to pay out on the instruments.
Easing distribution criteria makes Deutsche’s AT1s a bit more like other bonds and a bit less like shares, with holders receiving more certainty over payouts and needing to spend less time poring over financial reports. And going long on bank bonds and short on bank shares has been a roaring trade in recent years.
While Deutsche is a special case in many ways among European banks, in one way it has hardly been unique of late: doing alright at building up or maintaining capital while struggling on profits, something that is better for bondholders than shareholders. The bank made a pre-tax loss of €2.6bn last year, while the common equity tier one ratio ended the year where it began, at 13.6%.
Owning bank shares is a bet on high interest rates. But owning bank bonds is a bet, in part, on central bank easing and firms’ ability to offload riskier assets. Interest rates are unlikely to rise in Europe anytime soon, but Deutsche has at least made progress in getting rid of unwanted exposures in its Capital Release Unit.
In light of all this, Deutsche’s AT1 issuance success is hardly surprising, but the bank’s long-term shareholders will have to wait a while yet before celebrating.