Handelsblatt Exclusive Deutsche Bank plans partial float of asset management unit

Deutsche Bank is preparing a partial initial public offering of its fund management unit Deutsche Asset Management to beef up its capital base, Handelsblatt has learned. But no final decision has been taken yet.

Deutsche Bank is preparing plans to sell off parts of its subsidiary Deutsche Asset Management, according to Handelsblatt sources at the financial institution.

A partial flotation of Deutsche Asset Management is considered a done deal, a fund expert within the institution told Handelsblatt on condition of anonymity. Another source at Deutsche Asset said there are “concrete preparations” for an initial public offering.

The supervisory board at Deutsche Bank, however, has not yet made a final decision, sources said. It’s still possible that the board could decide against a partial flotation.

There have been rumors since last fall that Deutsche Bank could sell 25 percent of its shares in Deutsche Asset Management. The subsidiary has a stock market value of at least €6 billion, according to insider sources.

Deutsche Bank and Deutsche Asset Management declined to comment.

Deutsche Bank’s asset management division is a jewel in its crown and has been delivering the ailing giant with a steady stream of income for years. But Deutsche Bank may spin off part of its money-spinner and list it on the stock market because it needs capital.

An initial public offering of Deutsche Asset Management, or DAM, is “seen as a done deal inside the bank” said a funds expert at Deutsche. Another employee said there were “concrete preparations” to take the funds unit public.

But there’s no final decision yet.

A partial sale of the subsidiary would go against the message Deutsche Bank Chief Executive John Cryan sent last September in a letter to staff following persistent rumors that Deutsche may sell it to beef up its capital reserves.

“Do not allow yourself to become distracted by speculation about alleged mergers or sales plans,” he wrote. “There is one rumor in particular that I would like to dispel by making it unambiguously clear that Deutsche Asset Management is and will remain an essential part of our business model.”

The downside for asset management firms is that they lose access to distribution channels when they’re spun off from their parents.

Deutsche Bank had planned to sell its retail banking unit Postbank, but is now considering re-integrating it because it couldn’t fetch an acceptable price.

Spinning off a unit as lucrative as DAM is seen as an emergency measure and the fact that the bank is seriously considering a partial sale shows the importance it attaches to strengthening its chronically slender capital cushion.

The bank’s capital base is seen as its biggest weakness alongside its many legal risks. It wants to boost its equity capital ratio to at least 12.5 percent in the medium term from just above 11 percent in September 2016.

Selling part of DAM could help achieve that because the bank estimates its market value to be at least €6 billion, or $6.45 billion. That’s around 0.8 percent of DAM’s assets under management which amounted to €715 billion at the end of September. Some market participants put its bourse value at up to €8 billion.

 

 

 

25 p34 Asset Managers in Germany-01

However, a partial sale would mean Deutsche Bank would no longer receive the full amount of the stable, reliable earnings generated by DAM. In the first nine months of 2016, it delivered pretax profit of €549 million. Deutsche Bank’s asset management division generated an impressive return on equity of around 30 percent because the bank doesn’t need to devote much capital to back the low-risk business.

Deutsche Bank is likely to want to keep as much of DAM as it can. But it would probably take at least 25 percent public because investors would want the stock to be liquid. Sources at DAM said that any partial sale would amount to less than 50 percent of its capital.

An IPO would likely be welcomed at DAM, where staff morale has taken a fresh hit from the recent announcement that most bonuses will be cancelled.

DAM’s workforce has long struggled with job cuts and continued uncertainty about its future.

Deutsche Bank wouldn’t be the first bank to increase its financial leeway with help of its asset management business. In December Italy’s Unicredit sold its fund unit Pioneer to Amundi of France for just over €3.5 billion.

The downside for asset management firms is that they lose access to distribution channels when they’re spun off from their parents. That’s why consultants think a partial DAM flotation makes more sense because it wouldn’t cut off the unit from sales outlets, at least not initially.

Asset management firms are fundamentally a good investment, said Jan Altmann, head of consultancy 4Assetmanagement. There are vast sums of capital to be invested and business is relatively stable because the clients’ assets don’t disappear overnight.

The IPO of a pure asset manager would be unprecedented in Germany but the flotation of Amundi in France and Schroders in Britain are successful models. Besides, the world’s biggest fund manager, U.S. firm Blackrock, is listed.

DAM’s market value depends on its cost-income ratio. Michael Klimek, founder of consultancy Klimek Advisors, said: “A market value of six to seven billion euros sounds realistic at first sight. But it would be a higher share of assets under management than a few years ago when the division was up for sale — and the sale was then cancelled.”

He added there were no guarantees that the float would hit that level. “The overall asset management sector faces challenges and there are additional problems at the company itself so the timing for a flotation isn’t good,” he said.

He said the problems were the high level of fund withdrawals at DAM and the company’s sizeable share of alternative investments which weren’t doing well globally at the moment.

Private and institutional investors withdrew around €15 billion from DAM funds and investment mandates by the end of November, according to industry association BVI. Major competitors by contrast had inflows in the billions of euros.

Other problems include cost pressures in compliance and possible problems stemming from an upturn in interest rates that many analysts are now forecasting.

“These days an asset manager needs good performance and good distribution and DAM has problems in both those areas,” said Mr. Klimek. That’s why there can be only one reason to go public right now: “The bank needs capital.”

 

Ingo Narat is an editor with Handelsblatt's finance section. Anke Rezmer covers the investment fund industry for Handelsblatt out of Franfurt, Germany's finance capital. Michael Maisch is the deputy chief of Handelsblatt's finance desk and based in Frankfurt, Germany's financial capital. Yasmin Osman is a financial editor with Handelsblatt's banking team in Frankfurt. To contact the authors: [email protected], [email protected], [email protected] and [email protected]