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Deutsche Bank: A Model of German Inefficiency

NEW YORK (TheStreet) - Unless Deutsche Bank (DB - Get Report) decides to cut its dividend, the banking conglomerate's spending on dividend payments is set to rise even as it raises EUR 8 billion as a means to shore up its financial position.

The obvious contradiction of making significant dividend payments, while simultaneously working to raise new capital underscores the extent that Deutsche Bank has bet it could muddle through the global financial crisis and a bleak economic outlook in Europe.

Muddling through now is almost assured and when the final numbers come out in Deutsche Bank's capital raise, one wonders whether the firm should have approached things differently.

Was the EUR 1.45 billion in dividends Deutsche Bank paid in 2012 and 2013 really worth it? Now the bank will now need to sell 60 million new shares as a means to raise EUR 1.75 billion from Paramount Holdings, an investment vehicle of former Qatari Prime Minister Sheikh Hamad Bin Jassim Bin Jabor Al-Thani.

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Is Deutsche Bank's EUR 0.75 cent dividend really worth fighting for at its May 22nd annual shareholder meeting? The bank is looking to sell a further 300 million new shares, raising EUR 6.3 billion, potentially putting total shareholder dilution in the two-part capital raise in excess of 20%.

Was there any benefit to paying dividends far in excess of annual net income in recent years and just as European banking authorities took a tougher line on stress testing and bank capital ratios?

These are questions Deutsche Bank shareholders may be asking themselves after the Frankfurt-based lender announced a plan to raise a total of EUR 8 billion as a means to bolster its balance sheet.

The new capital measures are forecast to boost Deutsche Bank's Tier 1 Common Equity ratio 2.3% to 11.8%, and the firm now targets a 3.5% leverage ratio by the end of 2015. It will also dilute earnings per share (EPS) by about 25% depending on the pricing of the equity offerings.

For years, there has been a near consensus among analysts and rating agencies that Deutsche Bank would eventually need to raise new equity capital as a means to recover from the crisis and meet new regulatory standards. Now, analysts are mixed as to whether Deutsche Bank will have to tap equity markets once more.

Societe Generale analyst Andrew Lim forecasts Deutsche Bank needs a further EUR 5 billion in capital.

Bank of America Merrill Lynch, however, downgraded Deutsche Bank to 'underperform' citing their belief investors may simply give up on the bank. "[W]e think Deutsche Bank now risks being structurally valued at a discount to book," BAML analysts wrote. They project the equity offerings will dilute Deutsche Bank's 2015 earnings per share by 26% and also note a concern that the new capital merely fills holes, with larger question marks remaining.

Jefferies analysts took a more optimistic view, stating Deutsche Bank has turned the page on its capital needs, possibly setting a floor on its share price.

"Today, we are launching a package of measures designed to reinforce Deutsche Bank's aspiration to be the leading client-centric global universal bank," Jurgen Fitschen and Anshu Jain, co-CEO's of Deutsche Bank, said in a press release.

Those comments indicate Deutsche Bank may continue to try to press a strategy of offering services in all capital markets areas that is now out of favor at competitors such as UBS (UBS), Barclays (BCS) and Royal Bank of Scotland (RBS), who are cutting costs. Hopefully, Deutsche Bank steals significant market share, and in a profitable manner.

Deutsche Bank now targets a 12% adjusted return on equity (RoE) in 2015 and a RoE of 12% on a normal basis in 2016. Cost-to-income ratios are now forecast to come in at 65% in 2015 and 2016.

By contrast, BAML analysts expect a below-9% RoE, while Jefferies analysts foresee a 9.2% RoE when adjusted for the rights issue. Societe Generale's Lim forecasts Deutsche Bank will suffer a normalized RoE of just 6.9%.

What is most worrisome is status quo.

The bank still believes strongly in its dividend. "Deutsche Bank aspires to return surplus capital to shareholders - including in the form of competitive dividend payout ratios - in the long-term," the firm said on Sunday.

Meanwhile, things could have turned out far worse for the Deutsche Bank. Bank balance sheets have been supported by a recovery in the finances of nations across the Eurozone, in addition to aggressive tactics from European Central Bank president Mario Draghi.

Bottom Line: One wonders whether Deutsche Bank would have been better off not muddling on with its dividend until its capital needs were filled.

>> Read More: Deutsche Bank Should Cut Its Dividend

-- Written by Antoine Gara in New York.

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