Deutsche Bank board to review $8.5bn capital plan

Bloomberg

Deutsche Bank AG’s supervisory board will meet to discuss a plan to raise more than 8 billion euros ($8.5 billion) as Chief Executive Officer John Cryan tackles concerns about capital levels, a person familiar with the matter said.
The bank confirmed a Bloomberg News story that said the lender is planning an equity offering and the sale of part of its asset management unit after failing to find a buyer for its Postbank consumer business, which had been a key pillar of Cryan’s strategy. The bank may now seek to reintegrate Postbank.
While Cryan, 56, has focused on improving internal controls and scaling back capital-intensive debt-trading businesses since taking over in 2015, some investors and clients aren’t convinced the overhaul will restore profitability. Frankfurt-based Deutsche Bank lost market share in the fourth quarter as mounting legal costs fueled concern about its financial strength.
“The capital increase is the right way to go,” Andreas Plaesier, an analyst at Warburg Research said by phone. “Timing is important too given the fact that other European banks may need more capital,” he said. The measures the board is discussing this weekend may boost capital by more than 10 billion euros.

New Roles
Deutsche Bank also is studying management changes, including a new role for Chief Financial Officer Marcus Schenck, people familiar with the matter said. Schenck and Christian Sewing, who oversees wealth management and consumer banking, may be named co-deputy CEOs,
positioning them as potential
successors to Cryan. The firm is weighing recombining its investment-banking and trading divisions, with Schenck overseeing the business alongside Garth Ritchie, one of the people said. Jeffrey Urwin, who runs the investment-banking unit, plans to leave, reports said.

Mortgage Settlement
Doubts about Deutsche Bank’s financial strength intensified after the U.S. Justice Department in September demanded $14 billion to end an inquiry into mortgage securities that fueled the 2008 financial crisis. Investors were relieved when the final settlement in December came at about half that amount. That’s helped almost double the lender’s share price since Sept. 26 and made a potential stock sale more attractive. Cryan had been focused on selling Postbank to raise capital. But the bank has been unable to find a buyer for the unit, which employs 18,000 people.
Possible IPO
Deutsche Bank could sell as much as 30 percent of the asset-management unit in an initial public offering, the people said. The division had 774 billion euros of client assets at the end of 2016.
An IPO of the fund-management business may be attractive to investors who have watched the success of Amundi SA, France’s largest asset manager, since controlling shareholder Credit Agricole SA listed it on the Paris market. The stock is up more than 20 percent since its IPO in November 2015, and the company posted its highest quarterly inflows in two years in the fourth quarter.
Deutsche Bank’s asset-management unit had seen six consecutive quarters of net money outflows by the end of last year. Division head Nicolas Moreau, who joined the business in October, pledged to reverse the trend. Deutsche Bank’s management board earlier planned to wait for the completion of new banking standards that could force the firm to hold yet more capital, including for Postbank, before finalizing fresh measures. After failing to deliver a deal in early January, the Basel Committee of global banking supervisors once again left the table this week without an agreement, fueling uncertainty over the timing.

Capital Target
The bank’s common equity Tier 1 ratio is still 60 basis points shy of the target for the end of 2018. With revenue under pressure from low interest rates, Deutsche Bank also is trying to build capital organically by improving profitability. The lender has withdrawn from several countries and recently announced that it will drastically cut bonuses for about a quarter of its staff. Schenck said new rules could add 100 billion euros to its risk-weighted assets, which amoun- ted to 358 billion euros at the end of 2016. The increase would probably come over seven to 10 years, he said.
The capital plan “is a step in the right direction, but still way short of what they need,” said David Hendler, head of Viola Risk Advisors, an independent research firm. “They need to have better profitability in investment banking, lending and everything else they do.”
Deutsche Bank acquired Postbank seven years ago under then-CEO Josef Ackermann, hoping the move would help reduce its reliance on investment banking. The company wasn’t able to realize anticipated cost savings by acquiring the business. And limits on leverage made its mortgage business less attractive, the bank said. Labor union Verdi said in February that it opposes reintegrating Postbank into Deutsche Bank
because it would put jobs at risk.