Deutsche Bank Reaps Bond-Market Rewards After Return to Profit

(Bloomberg) -- Deutsche Bank AG enjoyed the benefits of a return to profit, as it sold bonds for the first time since breaking a five-year run of annual losses.

The lender issued two notes on Monday at spreads far below a similar sale in November after jumping into the market following last week’s earnings announcement. Investor orders closed at about 7.6 billion euros ($9.2 billion) across the 3 billion-euro offering.

“It was a fantastic response,” said Jonathan Blake, the bank’s global head of issuance and securitization. “We saw a number of new investors we hadn’t seen in a while.”

Tighter pricing in new deals and outperformance by existing notes show that Deutsche Bank is winning back debt-investor confidence amid an improved capital base and signs of progress in a turnaround plan. The new bonds also still offer a premium to other large lenders, spurring speculation that gains for the bank’s debt may have further to go.

“There is room for compression versus other large-cap banks,” said Lloyd Harris, head of fixed income at Premier Miton Investors, which holds some of the bank’s bonds. “The balance sheet is strong enough that there are no real credit concerns.”

Deutsche Bank paid 150 basis points above mid-swaps on an 11-year note as part of Monday’s sale. That compares with 205 basis points on a 10-year bond in the November deal. Both notes can be called one year early.

READ MORE: Deutsche Bank Caps Top Year for Debt Trading With 17% Gain

Still, the new spread was 67 basis points wider than on a similar note sold by BNP Paribas SA last month. Deutsche Bank’s shorter tranche was also almost twice as costly as a comparable recent Swedbank AB issue.

The premiums reflect Deutsche Bank’s legacy of high costs and low revenues, and the bank is also still only about halfway through Chief Executive Officer Christian Sewing’s turnaround plan. A surge in fixed-income trading helped the lender post a 2020 net profit even as other units failed to boost fourth-quarter revenue.

The bank also faces capital pressures this year as regulatory changes will cause an about 20 billion-euro increase in risk-weighted assets. That will pare its Common Equity Tier 1 ratio, a key measure of strength, closer to a minimum target of 12.5%.

The lender does have some breathing room as it reported a ratio of 13.6% last week, surpassing analysts’ expectations. Buffers will remain well above minimum requirements, according to CreditSights.

Fitch Ratings Inc. also last month revised the bank’s outlook to positive from negative, citing restructuring progress. The impact of the pandemic on the bank’s financials and strategy has been manageable, it said.

Deutsche Bank is “in a better place than they were last year,” said Carlos Suarez Duarte, a credit analyst at Allianz Global Investors.

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