Nothing is taboo for Deutsche Bank at the moment.
After decades of growth and expansion around the world, Germany’s largest bank is looking to shed all non-essential operations. No sector is considered off limits in the quest to restore profit.
But now, weeks before a major overhaul is unveiled, Deutsche Bank is on the defensive in the United States, where regulators are putting its operations under renewed scrutiny, and in China, where management is considering the sale of its stake in a Chinese bank.
The U.S. Federal Reserve is expected to fail Deutsche Bank's U.S. commercial banking arm, Deutsche Bank Trust Corp., in a new “stress test” designed to test the bank's internal controls, The Wall Street Journal reported.
The U.S. market is still the world’s largest financial market. At the end of the day, the international bank may be prepared to part with a lot of things, but not typically with their foothold in the United States. Guido Hoymann, Bankhaus Metzler
Part of the bank’s operations in China, the world’s second-largest economy, may also be up for sale. Deutsche Bank holds a 20-percent stake in a Chinese bank, Hua Xia Bank, which is valued at €1.6 billion.
Sources told German weekly magazine WirtschaftsWoche that the recovery in the Chinese stock market has put the prospect of a sale back on the table.
Analysts suggest that while the sale of some smaller parts of the bank’s U.S. operations cannot be excluded, the sale of its stake in China is far more likely.
“The U.S. market is still the world’s largest financial market. At the end of the day, international bank may be prepared to part with a lot of things, but not typically with their foothold in the United States,” Guido Hoymann, a banking analyst with German private bank Bankhaus Metzler, told Handelsblatt Global Edition.
“By comparison to its U.S. business, the sale of a stake in a Chinese bank would not exactly put the bank’s entire perception, or its positioning globally, into question,” Mr. Hoymann added.
Still, Deutsche Bank’s failure to pass the Fed's latest stress test in the United States would be an embarrassment.
It is the first time the German bank is in the Fed's test, which unlike a similar examination by the European Central Bank, examines not only the amount of capital a bank holds, but the quality of its controls and IT systems.
It is because of the latter – poor control systems – that Deutsche Bank is likely to fail the Fed’s stress test, the newspaper reported.
It would not be the first time the bank has faced scrutiny in the United States. Deutsche Bank has already invested €3.6 billion in upgrading its control systems in the United States.
Deutsche Bank would not comment directly on the Fed’s stress test, the results of which are to be released in March, but noted that the operations of its U.S. subsidiary make up just 5 percent of its total assets.
The bank’s more lucrative investment banking operations in New York are not affected by the Fed’s new test. The Trust Corporation is a subsidiary that deals mostly with wealthy private clients and payment transactions.
Anshu Jain, the bank's co-chief executive, has said that repairing the bank’s U.S. operations will take time. He acknowledged that U.S. banks have been more aggressive in repairing their balance sheets and improving their control systems in the aftermath of the 2008 global financial crisis.
“We should not forget that our competitors over there began with the recovery and repair of their business immediately after the crisis," Mr. Jain told a German weekly, Die Zeit, last week. "We have to show them respect for this. They started already in 2009, while we hesitated and began our shift much later. The U.S. banks have had a three-year head start.”
Deutsche Bank spent decades battling to establish a presence in the United States – a success that the Mr. Jain remains proud of to this day.
“If you want to act globally, you need to establish a beachhead in the United States,” he told Die Zeit in the interview.
Whether the stake in China’s Hua Xia Bank is to be sold is another matter.
Unlike in the United States, Mr. Hoymann of Bankhaus Metzler noted that Deutsche Bank has never really succeeded in establishing a beachhead in Asia’s largest economy.
Given that the bank is refocusing on core markets, management has to question whether China is really worth the effort. Even if it does give up the stake in China, Deutsche Bank could still serve its more lucrative investment banking and large business customers on the continent.
Mr. Jain has repeatedly questioned whether the stake in Hua Xia Bank makes sense, sources on the non-executive supervisory board told WirtschaftsWoche.
Like most things that could be on the chopping block, the value of Hua Xia Bank is hotly contested. One source told WirtchaftsWoche that the bank “binds a lot of capital and has only moderate outlook.”
Rainer Neske, a management board member in charge of private banking, has vehemently defended the stake in China, the world’s second-largest economy. Sources told Handelsblatt the Chinese bank is still viewed as a profitable and important piece of its international advisory banking operations.
A spokesperson for the bank would not comment on “market speculation.”
Frank Wiebe is a New York correspondent for Handelsblatt, covering finance policy. Cornelius Welp is an editor at German weekly WirtschaftsWoche, covering banks and financial markets out of Frankfurt am Main. Christopher Cermak is an editor with Handelsblatt Global Edition, covering economics and finance. To contact the authors: [email protected], [email protected], and [email protected]