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Deutsche Bank Turnaround Plan Gets Mixed Investor Review

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Deutsche Bank AG Chief Executive Officer John Cryan needs to convince investors he’s finally on the right track after tearing up his own turnaround plan just 17 months into the revamp.

Reaction so far to his about-face — which includes an $8.5 billion rights offering, selling part of the asset-management business and reintegrating the consumer-banking unit — has been mixed. Cryan told Bloomberg TV on Monday that one key stakeholder had signaled willingness to participate in the share sale. Another large shareholder is undecided about the capital increase and will need convincing, a person familiar with the matter said.

The shares dropped on Monday the most in more than five months, following the announcement that Deutsche Bank will tap investors for the fourth capital infusion since 2010. The lender, which has posted more than 8 billion euros ($8.5 billion) of net losses in the past two years, has almost doubled in market value from a September low, making a share sale more palatable. Cryan is trying to sweeten the offer with the promise of renewed dividends and a return to profitability.

“We want to move back into modest growth mode, controlled growth,” Cryan said in the interview Monday. “The operating environment in the U.S. but also increasingly in the euro zone and especially in Germany looks strong. And so I’m reasonably confident about the future.”

Deutsche Bank executives on Monday afternoon faced questions during a call with analysts about what was behind the change in Postbank strategy and how the business environment may be changing in Germany. Chief Financial Officer Marcus Schenck, who was named Sunday as one of two deputy CEOs, told analysts that the lender had lost 1 billion euros in revenue last year as a result of the negative “noise” surrounding the bank.

Deutsche Bank shares extended their decline during the call, dropping as much as 7.6 percent to 17.69 euros and trading 7.1 percent lower as of 4:12 p.m. in Frankfurt. Before Monday, the shares had rallied 44 percent in the past six months.

The bank’s additional Tier 1 bonds jumped after the lender announced the share sale on Sunday and said it will pay voluntary annual coupons due next month. Its 1.75 billion euros of AT1 notes, the first bonds to take losses in a crisis, rose 3 cents on Monday to 97 cents on the euro, according to data compiled by Bloomberg. The bonds fell as low as 70 cents last year amid investor concern that falling earnings and multi-billion-dollar settlements for historic misconduct would cause the bank to skip interest payments.

The top shareholder expressed concern that the latest announcement marks yet another strategy reversal that is difficult to fully understand, said the person, who spoke on condition of anonymity. The lender has under delivered on previous strategic changes and there’s a risk that the two new deputy CEOs named on Sunday will end up turning Cryan into a lame duck, said the person.

Cryan told Bloomberg on Monday that the deputies were installed at his request as the company focuses more on the German market with the reintegration of Postbank. The decision reflects a strong performance by the unit and a changed environment for banks, he said. Yet the developments also underscore how, almost two years after he took over, Deutsche Bank has been unable to plot a course to a more profitable future while trying to eliminate 9,000 jobs.

Read Bloomberg Intelligence analysis on the lender’s overhaul

“Our interpretation of this change in strategy is that the German faction has won its first battle in 10 years,” Dieter Hein, an analyst with Fairesearch who recommends selling the stock, wrote to clients on Monday.

Some investors welcomed the developments as a way to end questions about the firm’s financial strength. Selling a minority stake in the asset-management unit within the next two years and unloading some assets at the investment bank will help raise another 2 billion euros of capital. Deutsche Bank’s last three capital increases raised about 21.7 billion euros — compared with the current market value of 26.4 billion euros.

“The shareholder dilution is enormous,” said Michael Huenseler, an investor at Assenagon Asset Management, which holds a stake in the German lender. “But at the same time, this package should end what has been hurting Deutsche Bank for so long: the discussion about the capital situation. Now the bank has to prove that it can be profitable.”

Deutsche Bank plans to integrate the Postbank consumer division and still aims to reduce total costs to 22 billion euros by 2018, the company said Sunday. Schenck, 51, and Christian Sewing, who oversees wealth management and consumer banking, will become co-deputy CEOs. The Frankfurt-based company said it will find a new CFO “in due course.”

Last month, a Chinese conglomerate led by aviation tycoon Chen Feng became the fourth-largest shareholder by taking a 3.04 percent stake.

The capital increase was underwritten at 11.65 euros a share, a 39 percent discount to Friday’s closing price of 19.14 euros, by a consortium that includes Credit Suisse Group AG, Barclays Plc, Goldman Sachs Group Inc., BNP Paribas SA, Commerzbank AG, HSBC Holdings Plc, Morgan Stanley and UniCredit SpA.

Losses and mounting legal bills had raised doubts about Deutsche Bank’s financial strength. While the bank in December settled a U.S. Justice Department inquiry into crisis-era mortgage securities for about half of what authorities originally sought, the firm still faces investigations into whether it manipulated foreign-currency rates and precious metals prices and whether it facilitated transactions that helped investors illegally transfer billions of dollars out of Russia.

Cryan said the capital measure will bolster confidence in Deutsche Bank as a counterparty, after some clients reduced business with the lender in the fourth quarter. The bank said the share sale will boost its common equity Tier 1 ratio to 14.1 percent and that it aims to stay “comfortably above” 13 percent. The measure stood at 11.9 percent at the end of 2016.

“It’s a very smart move and the conditions are perfect,” said Davide Serra, founder of Algebris Investments LLP. “Ten billion euros is what will fix it once and for all.”

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