Investment Banking Deutsche Bank Wavers on Postbank Sale

Deutsche Bank had hoped to sell its ailing retail subsidiary Postbank to boost its thin capital base, but it may reconsider if it fails to find a viable buyer.
The Postbank HQ in Bonn.

Deutsche Bank may backtrack on its plans to sell Postbank if it fails to find any viable buyers. Chief executive John Cryan is desperate to push through a sale and free up the capital currently tied up in the subsidiary for other areas of business. But given the dismal situation in Europe's banking sector, there are currently no buyers for the Bonn-based retail bank.

Potential suitors are struggling with their own problems and the zero interest-rate policy of the European Central Bank. One manager at the bank suggested the deal may be taken off the table, saying: "If we can't get a good price, we won't sell Postbank."

Morgan Stanley analysts warn that it could become a lot more difficult or even impossible for the bank to dispose of its subsidiary following the uncertainty triggered by Britain's vote to leave the European Union. In view of the increasingly stringent requirements imposed by regulators, the analysts estimate that Deutsche Bank has a capital gap of €8.9 billion ($9.8 billion).

Deutsche Bank, which is Germany's biggest bank, has had a turbulent time in recent weeks, with its U.S. arm failing a stress test conducted by the Federal Reserve, the central bank of the United States. The International Monetary Fund branded Deutsche Bank the riskiest bank in the world, and in early July its share price plunged to an all-time low of €11.22.

But Mr. Cryan's biggest problem is the bank's thin capital base. The British-born chief executive has repeatedly emphasized that the bank can manage without a further capital increase, even though its core capital ratio has recently contracted from 11.1 to 10.7 percent. That is a lot lower than what regulators want to see in the medium term and a long way from the bank's own target of 12.5 percent.

As a stopgap, the bank could dispose of its asset management business, a relatively independent division.

The sale or stock market flotation of Postbank was a key component in plans to strengthen Deutsche Bank's capital base. Deutsche Bank paid €5.5 billion for Postbank, and analysts estimate that the subsidiary is still listed on its accounts at a value of €4 billion to €4.5 billion. But hardly anyone now expects Postbank to either float or sell for anything like that amount.

That means the parent bank would probably have to write down the value of the subsidiary substantially before a spin-off.  These write-downs would put a further strain on Deutsche Bank's capital buffer.

John Cryan was thought from the beginning to be opposed to a sale of Postbank, as it would cause Deutsche Bank to lose market share in an area of business where economies of scale are important. He told colleagues some time ago that a spin-off made no sense from a strategic viewpoint, but that it would serve as a kind of hidden capital increase. In May, Mr. Cryan said that "creative solutions" were needed for Postbank, without specifying what these might look like. Sources in the banking sector say that a point will be reached in the fall or next spring at the latest when a decision has to be made. If no serious buyers have emerged by then, it is reported, there is a strong possibility that Deutsche Bank will decide to keep Postbank.

The irony is that Deutsche Bank finally concluded the arduous and costly process of internal separation from its subsidiary just a few weeks ago. "If we hadn't already separated Postbank, we'd probably just leave it now," sources at the bank say. At the subsidiary, however, all the signs are still thought to be pointing to an IPO next year. German monthly business magazine Manager-Magazin was the first to report on the possible reintegration of Postbank. The magazine also reported that Deutsche Bank had considered breaking up its investment and commercial banking operations, but a bank spokesman dismissed the report. The spokesman did however confirm that the bank was considering a reorganization to simplify its corporate structure.

Deutsche Bank is still determined to boost its capital base in other ways, by retaining profits for example and streamlining its balance sheet. It has little choice in the matter. Investors do not believe that another capital increase via the market will be possible, in view of the massive drop in the bank's share price. Downsizing will take time, however, and further bad news is looming on the profits side. Analysts are anticipating a loss of almost €860 million on average for 2016.

Deutsche Bank is therefore also hoping that the government will ease pressure on banks in view of the mess that the entire sector is in, by at least refraining from imposing even tougher capital requirements on banks. As a stopgap, the bank could dispose of its asset management business, a relatively independent division. If it is unable to meet its capital targets by itself, these sectors would be the first to be put up for sale.

 

Daniel Schäfer is head of Handelsblatt's finance pages and based in Frankfurt.  Michael Maisch is the deputy chief of Handelsblatt's finance desk in Frankfurt am Main. To contact the authors: [email protected] and [email protected]