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TheStreet Open House

Deutsche Bank's Capital Infusion and Its Qatari Benefactors

NEW YORK (TheStreet) -- Germany's largest bank, Deutsche Bank (DB), is to have a major new shareholder -- the royal family of Qatar. In order to raise capital up to $11 billion, the bank is going to be issuing an additional 360 million shares.

Shares worth $2.4 billion will go to a company owned by Sheikh Hamad Bin Jassim Bin Jabr Al Thani while the rest will be in the form of a rights issue to existing shareholders.

Why did the bank need such a major capital infusion now? It needs a cushion.

European regulators have criticized the region's banks for having very thin capital buffers to withstand the financial shocks that plagued the world economy for the past few years.

Be it the 2008 subprime crisis that started in the U.S. or the eurozone fallout more recently, banks are required to have enough capital on their books to absorb losses. In industry jargon, it is referred to as a Tier 1 capital ratio. Before the announcement, Deutsche Bank's ratio stood at 9.5%. It is now expected to improve to 11.8%, a major step up from the paltry 6 % in the middle of 2012.

However, there is a downside to the equity infusion. With new equity returns to existing shareholders get diluted, and in some cases the stock market can punish a company for such an action.

While the market did push up Deutsche Bank shares slightly after the announcement shares are currently down to $41.52, down 14% for the year to date in an environment the bank's joint CEOs, Anshu Jain and Jurgen Fitschen, have described as "challenging."

For Qatar, the deal marks another milestone in its reputation as a major mover and shaker in the world of high finance. A controversial investment in Barclays, dubbed a "rescue act," has attracted regulator scrutiny. Credit Suisse (CS), the Swiss bank, has Qatar Holdings LLC as a major investor, with around a 21% stake in terms of voting rights.

As is the case with most things in Qatar, the complex web of royalty, government and private enterprise all work in concert when making these large investments in Western institutions. Sheikh Hamad Bin Jassim Bin Jabr Al Thani just happens to be the former Prime Minister of Qatar, and is now reputed to oversee a fund that is said to be worth between $100 billion to $200 billion for such investments.

Rating agencies that have been unsparing of Deutsche Bank recently -- Fitch maintains a negative outlook for the bank despite the capital infusion -- will want the senior management at the bank to be making other improvements around cost efficiency and its investment banking business before changing their minds.

If Deutsche Bank dilutes equity again it might not get an understanding reaction from the markets or from its new Qatari shareholders.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

>>Read more: Deutsche Bank: A Model of German Inefficiency

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