Righting the ship
Should it succeed in charting a course to the promised land, Deutsche Bank may point to 2020 as the year in which it began to right the ship. For bringing investors on board that journey while navigating turbulent waters, Deutsche Bank is IFR’s Financial Issuer of the Year.
Last year looked challenging from the outset for Deutsche Bank.
One of the largest issuers in the European banking space, it had a hefty issuance plan to manage, while also seeking to make headway on a deep and much-needed restructuring aimed at cutting costs, shedding jobs and scaling back and refocusing its investment bank.
Even after the coronavirus pandemic changed everything, Deutsche’s pragmatic, consensual approach allowed it to successfully enact a still sizeable revised issuance plan of €10bn–€15bn.
Deutsche would ultimately print more than €14bn-equivalent, while seeing its spreads tighten significantly to those of its peers.
“As we came into this year, things looked fairly difficult from a Deutsche Bank credit perspective,” said Jonathan Blake, global head of issuance and securitisation at the bank’s treasury.
“Nonetheless, we managed to issue pretty much every type of bond in every market, be it covered bonds to AT1, US dollars, euros or sterling, and green and non-green.”
Senior non-preferred issuance for MREL/TLAC requirements represented the lion’s share of Deutsche’s 2020 issuance.
The bank made a swift start with a dual-tranche euro and sterling SNP offering in early January that won the bank’s largest ever book in the UK currency. Some £2bn of orders chased a £850m short five-year tranche, which was one of the joint-largest sterling SNP issues of 2020.
That deal, issued alongside a €1.5bn seven-year note, typified the approach that would repeatedly deliver success for Deutsche over the course of the year, said Adekunle Ademakinwa, head of the FIG syndicate desk.
With a new focus on listening to investors, the bank targeted a specific maturity point that sterling accounts indicated “would be the best place to start their journey back with DB”, he said.
After lagging its peers, Deutsche also took strides into the ESG space with a blowout green bond debut in June.
The €500m no-grow 1.375% six-year non-call five senior preferred issue was 9.5 times subscribed with orders passing €4.75bn. That allowed bankers to cut the spread to mid-swaps plus 167bp, representing a tightening of 33bp from initial guidance.
The bond was the first callable senior deal issued publicly by a German bank, a landmark that Deutsche followed with the country’s first callable SNP in August.
The deal backed up the announcement of Deutsche’s ESG targets in May. The firm aims to execute €200bn in sustainable financing and investments by 2025 and plans to stop funding activities in coal mining by the same time.
On a journey
The year was not without missteps. The bank pulled a planned Australian dollar SNP in September after markets turned against it. But on the whole, the bank’s more open dialogue with investors steered it through an unpredictable year.
“It’s about listening to the marketplace, understanding the fact that we’re trying to get to a point where people stay on the Deutsche Bank journey,” said Ademakinwa.
Though SNP was the focal point, Deutsche also returned to the Additional Tier 1 market, printing a US$1.25bn SEC-registered perpetual non-call 5.75-year.
The deal, Deutsche's first AT1 in six years, would have been unthinkable just months before. For years the bank was, in effect, priced out of the market. But management’s restructuring of the bank and an untamed rally in the asset class gave the issuer the impetus to return.
Investors poured in more than US$14bn of demand for the deal that was priced at 6%, 75bp tighter than initial price thoughts.
Who’s calling?
The bank’s timing in issuing capital unseasonably early in the year proved fortuitous, given the sell-off that hit in March.
As the crisis took hold, Deutsche become only the second bank to extend an AT1, announcing in mid-March that it would not redeem its US$1.25bn 6.25% bond at its first call date.
At one point in time, extending would have been a controversial move, especially as February’s issuance had raised expectations that the bond would be redeemed.
But the highly uncertain environment called for caution, while redeeming the AT1 would reduce Deutsche's Common Equity Tier 1 by about €200m due to FX movements.
In that context the decision was largely understood.
“A lot of investors were OK with it and that was helped by the fact that at that point in time the spread at which we could have issued a new security was roughly at the reset spread,” said Blake.
“That meant most of the investors understood the logic. Frankly, the expectation that all issuers call automatically is no longer the case.”
Other issuers would follow Deutsche’s example before markets recovered.
Open for business
In May, Deutsche sold the first euro capital issuance from a financial institution since the crisis began, printing a €1.25bn 11-year non-call six transaction.
It was a costly trade compared with the levels available pre-Covid, landing at 600bp, but the more than €2.2bn of demand showed the euro sub-debt market was open for business after the successes of UK issuers in sterling.
The deal was the first from an EU bank to take advantage of the ECB’s early implementation of new rules on Pillar 2 requirements, granting banks permission to use AT1 and Tier 2 towards their capital requirements in place of more costly Common Equity Tier 1 capital.
The issuance – which was de-risked through a tender targeting €2bn of its SNP securities – meant Deutsche was able to increase the distance to its tightest regulatory capital requirements.
As the year wore on, the perception of Deutsche began to change.
After five years of annual losses up to the end of 2019, Deutsche is seeking to right the ship through a major cost-cutting overhaul that has seen it exiting some unprofitable businesses, particularly in the investment bank, to allow it to focus on strengths such as bond trading.
It reported a surprise profit in the third quarter, as the investment bank, long a drag on earnings, benefited from increased trading amid market volatility.
The restructuring, announced in July 2019, has started to show results and in December, the bank confirmed its 2022 profitability target, announcing further cuts to reach it.
The bank’s capital position has long been a concern for investors, but under the pressures of the pandemic, it has sustained a solid capital and liquidity position.
That progress has been recognised by ratings agencies. In November, Moody’s changed the outlook on its A3 rating of the lender to stable from negative, saying the bank's management had laid the foundations for a sustainable turnaround.
Fitch, meanwhile, upgraded four of Deutsche’s AT1s to BB– from B+.
But it is in the secondary market that progress is most visible.
Take the senior market, where CreditSights analysts cite an excess return of 3.24% on Deutsche’s issuance compared with 1.51% for the rest of its coverage universe.
Some of that can be attributed to investors’ hunt for higher beta assets as markets rallied and spreads compressed in the second half, but the scale of outperformance versus its peers points to a broad reassessment of the lender and a recognition of its turnaround plan.
“That’s not just high beta performance; that’s a reversal,” said Blake.
“This really has been the year of the turnaround, in terms of spread performance but also in discussions with investors and the level of interest in our securities. It’s been a year in which the investor base has gone from underweight to overweight Deutsche Bank.”
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