Deutsche Bank is poised to take the most tangible step so far in its reorganization with the stock market spinoff of its DWS fund management group as early as next month. The planned sale of the money manager could bring as much as €2 billion to Germany’s largest bank, as it tries to recover from years of scandal, fines and losses.
While other measures, such as merging its Postbank unit into its own retail operations or restructuring corporate and investment banking, will take time to bear fruit, the initial public offering for DWS will be something positive Chief Executive John Cryan can show impatient shareholders at the annual meeting in May.
But some Deutsche shareholders are concerned that the bank is giving up a stake in one of its most profitable sectors. The bank said DWS will pay out some two-thirds of its profit as dividends. Analysts, meanwhile, question whether the growth and earnings targets set for DWS as an independent entity aren’t too ambitious.
DWS will push for internal growth rather than look for any big acquisitions.
In particular, said Stuart Graham at Autonomous Research, the goal of 3 to 5 percent increase in net capital inflows annually will be challenging and it will be difficult to maintain the 0.3 percent target for management fees without them. Growth in inflows in recent years have been below 3 percent – in 2016, when successive scandals rocked the bank, DWS even experienced net outflows of 5.5 percent. Margins will be under pressure because the high-margin actively managed funds have been hardest hit by outflows.
The IPO is a secondary placement, so the proceeds flow exclusively to Deutsche and won’t bring new capital to DWS. The bank expects proceeds somewhere between €1.5 billion and €2 billion, which is in line with Commerzbank's valuation of the firm between €6.1 billion and €10.4 billion. DWS Chief Executive Nicolas Moreau, who is also a member of Deutsche’s executive board, says current capital is sufficient and DWS will generate enough profit to provide capital for growth, even with the high dividend payout.
In an interview with Handelsblatt’s German edition, Mr. Moreau said that DWS would push for internal growth rather than look for any big acquisitions. However, he did not rule out targeted acquisitions to widen the firm’s product offering with more alternative investments like structured loans and private equity or to expand its geographic coverage in Asia or in European countries where it is underrepresented.
He said in particular a rumored merger with Allianz Global Investors, the fund unit of the giant insurer, wouldn’t make much sense. It would be “transformative” and that is not DWS’s strategy with the IPO. Analysts noted, nonetheless, that a share listing for DWS would facilitate such a merger.
The DWS IPO comes as insurers and other financial institutions are spinning off their fund management units. France’s AXA plans to list its US money manager, Alliance Bernstein, sometime in the first half. Asset managers are much in demand from investors, commented Matthias Hübner at management consultant Oliver Wyman. If fund managers want to compete in the top leagues, it makes sense to tap into capital markets, he added.
Mr. Moreau told Handelsblatt Germany that the greatest interest in the IPO seems to come from investors in the US and to a certain extent in Asia. It is the first stock flotation for a global asset manager in years, he noted. The DWS placement gives them an opportunity to add an asset manager to their portfolio and also to invest in the German financial sector.
The CEO also said foreign investors seem unconcerned about the structure of the company – a partnership with shares – even though it allows Deutsche Bank to keep total control and prompted some criticism in Germany. DWS will stick to the “one share, one vote” rule at shareholder meetings, he said. If Deutsche’s stake falls below 40 percent, the firm will be transformed into a normal joint-stock company. There will only be three Deutsche Bank representatives on the 12-member board.
“If it’s a good deal and meets strong investor demand,” Mr. Moreau said, “the legal structure won’t play a big role.”
Yasmin Osman covers banks for Handelsblatt in Frankfurt and Carsten Herz covers asset management and insurance. Darrell Delamaide adapted this into English for Handelsblatt Global. To contact the authors: [email protected] and [email protected].