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Deutsche Bank turnaround plan receives mixed investor reaction

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

[LONDON] Deutsche Bank AG Chief Executive Officer John Cryan needs to convince investors that he's finally on the right track after tearing up his own turnaround plan after just 17 months.

Reaction so far to his about-face - which includes an US$8.5 billion rights offering, selling part of the asset-management business and reintegrating the consumer-banking unit - has been mixed.

Mr 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 as much as 6.9 per cent on Monday after the announcement that Deutsche Bank will tap investors for the fourth capital infusion since 2010.

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The lender, which has posted more than 8 billion euros (S$11.886 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. Mr 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," Mr Cryan said in the interview Monday.

"The operating environment in the US but also increasingly in the euro zone and especially in Germany looks strong. And so I'm reasonably confident about the future."

Deutsche Bank dropped as much as 1.32 euros to to 17.82 euros, the biggest decline in more than four weeks, and traded 6.4 per cent lower as of 12.07pm in Frankfurt. Before Monday, the shares had rallied 44 per cent in the past six months.

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 Mr Cryan into lame duck, said the person.

Mr 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.

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.

Chief financial officer Marcus 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 per cent stake.

The capital increase was underwritten at 11.65 euros a share, a 39 per cent 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 US 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.

Mr 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 per cent and that it aims to stay "comfortably above" 13 per cent. The measure stood at 11.9 per cent 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."

BLOOMBERG

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