Divestment Debate Back to the Future

Deutsche Bank, struggling to maintain profit in an era of restrictive risk-taking, is considering big cuts to its trading business and taking its Postbank retail unit public, Handelsblatt has learned.
Deutsche Bank is considering its biggest downsizing in decades, Handelsblatt has learned.

 

Deutsche Bank, Germany's struggling banking leader, is moving closer to what may be a fundamental reordering of priorities and ambitions. The Frankfurt-based financial institution, dogged by uneven profitability, an overextended global operation and the strictures of new, tighter global banking rules, is considering one of the largest downsizings in its history, Handelsblatt has learned.

According to people with knowledge of the situation, some of the bank's top managers are considering selling a major portion of Deutsche Bank's trading business and a minority stake in its German retail bank, Postbank.

The bank's two co-chief executives, Anshu Jain and Jürgen Fitschen, are investigating whether these steps will provide new impetus for growth. Management board members have discussed the options but have not made any decisions, bank insiders said. A public listing and sale of a minority stake in Postbank would require approval from the bank's non-executive supervisory board.

At the end of last year , the bank's supervisory board chairman, Paul Achleitner, asked top managers to devise a strategy to return the bank to consistent profit. Analysts are expecting Deutsche Bank to report another loss in the fourth quarter, after a €1.3 billion loss in the period a year earlier.

But the deliberations on how to turn around Deutsche Bank -- and what if any divestments will be needed -- are controversial, insiders said, and so far top managers have not agreed on a plan. Some on the board want to take the bank back to its roots as a globally active, premium provider of banking services to businesses – 145 years after the bank was founded to finance German foreign trade.

The bank has struggled to regain its footing after the global financial crisis as governments and regulators have imposed stricter capital reserve requirements that have discouraged once-profitable but riskier forms of trading and banking. Aside from the structural challenges of adapting to a new, more sober banking landscape, Deutsche Bank has been hammered by declines in its securities trading business.

If the bank's more radical reformers win out, Deutsche Bank could end up making substantial cuts to its trading business, which has been weighed down by the costs associated with the higher post-crisis capital requirements. This could also affect the German bank's sizeable business in the United States, where it faces even more stricter regulatory requirements than in Europe.

If the abundance of regulations makes the universal bank model no longer viable, it's time to think about alternatives. Inside sources, Deutsche Bank

In recent years, Deutsche Bank has withdrawn from segments of the trading business, such as proprietary trading and commodities trading. Now other trading businesses in New York may be on the chopping block, the insiders said.

Managers are also considering floating a minority stake in Postbank, the former financial unit of the German postal service service that Deutsche Bank bought for €6.3 billion in a series of purchases beginning in 2009. Floating the Bonn-based retail bank may attract investors that want to take the German retail bank across borders into other European markets, the bankers said.

When Deutsche Bank acquired Postbank, it had hoped to use its vast deposits to finances it other businesses, but that plan was thwarted by the German financial regulator, BaFin. German lawmakers are also considering new guidelines that would force Deutsche Bank to hive off its investment banking activities from the rest of its business, a move the bank said would be devastating.

"If the abundance of regulations makes the universal bank model, with the consumer business and investment banking under one roof, no longer viable from a business standpoint, it's time to think about alternatives," said an insider with ties to the Deutsche Bank board.

If the major downsizing is approved, the bank's co-chief executives, Mr. Jain and Mr. Fitschen, are hoping to finally turn a corner on what has been a difficult effort to resuscitate the bank after the global financial crisis. Since they were appointed in June 2012, Deutsche Bank has suffered from a declining share price, weak returns and high legal costs, a legacy of the no-holds-barred, pre-crisis banking era.

Such major divestments, the first in at least 20 years, would also mark a final departure from the strategy of the previous, long-time chief executive, Josef Ackermann, who oversaw a series a major acquisitions that aimed to solidify the German bank's position in the top tier of global banking.

Four years ago, Mr. Ackermann touted the purchase of Postbank as the right strategic move. "The Deutsche Bank group will command a more balanced income mix and generally more stable earnings in the future," Mr. Ackermann, a Swiss national, said in 2010.

 

 

But the acquisition of Postbank, a bank that is run from German post offices, coincided with the beginning of the financial crisis. Deutsche Bank announced the transaction in September 2008, a few days before the collapse of investment bank Lehman Brothers. At the time, major Spanish bank Santander was seen as a potential buyer.

The €6.3-billion ($7.4 billion) acquisition was completed in several steps. In early 2009, the industry leader initially acquired a third of Postbank. With the help of a mandatory exchangeable bond and various stock options, as well as purchases on the market, Deutsche Bank's stake in Postbank continued to grow, eventually reaching 93.7 percent in early 2012.

It's important to us that we have a global player, Deutsche Bank, headquartered in Frankfurt, as a major financial center Ralph Brinkhaus, deputy parliamentary leader, CDU/CSU

On Wednesday, speculation of a possible sale of Postbank reached Germany's political capital in Berlin. A Green Party fiscal policy spokesman, Gerhard Schick, welcomed the notion "that shrinking the bank is finally being considered, and that they are specifically thinking about Postbank." The Left Party also liked the idea. "Deutsche Bank needs to be scaled down considerably. A spinoff of Postbank would only be a first step in this direction," said Left Party fiscal policy spokesman Axel Troost.

The center-right Christian Democratic Union and its Bavarian sister party, the Christian Social Union, were unwilling to comment on strategic decisions at Deutsche Bank. "It's important to us that we have a global player, Deutsche Bank, headquartered in Frankfurt, as a major financial center," said Ralph Brinkhaus, the deputy leader of the CDU in the Bundestag.

The CDU/CSU wants to weaken a legislative proposal to force banks to split off their investment from their retail operations. That measure is still in the Bundestag. Currently, German banks must only keep separate their lending to hedge funds. The European Union doesn't even require such a stringent separation as does German law.

 

Peter Kohler, Laura de la Motte, Frank Drost and Daniel Schäfer are editors who cover the financial sector at Handelsblatt. To reach the authors: [email protected], [email protected], [email protected], [email protected]