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Deutsche to Trim Investment Bank, Retail Operations

Written by Anton Murray Consulting on . Posted in Investment Banking MC, Investment Banking News, News

German lender’s plans part of overhaul to boost profitability and capital adequacy

Eyk Henning

Deutsche Bank AG said it would scale back its investment-banking and retail operations, part of a long-awaited strategic overhaul designed to close the gap with rivals for profitability and capital adequacy.

Germany’s largest lender said Monday that it also would strengthen transaction banking, which provides products and services to corporations and financial institutions, as well as its asset- and wealth-management unit.

“Today marks the next milestone in the journey we began in 2012. We reaffirm our commitment to being a leading global bank based in Germany [but] must…focus more sharply on mutually attractive client relationships,” co-Chief Executives Anshu Jain and Jürgen Fitschen said. Messrs. Jain and Fitschen also said the bank will close its operations in seven to 10 countries world-wide.

But the plan, which is in line with what has been previously reported by The Wall Street Journal and others, met initial skepticism. “The new targets are later-dated than we expected,” said analyst Amit Goel from Exance BNP Paribas. Jefferies analyst Omar Fall said the targets need to be taken with a pinch of salt given the bank’s weak history of delivering on goals.

Deutsche Bank’s shares dropped 4.6%, to €30.13 ($32.76), compared with a 1.9% rise in Germany’s DAX index.

Monday’s decline follows a rise of almost 40% in Deutsche Bank’s shares since mid-December, when reports surfaced that it was considering shedding its Postbank retail unit. Traders said Monday that investors were cashing in gains following the announcement.

The overhaul comes as Deutsche Bank’s shares have underperformed rivals since Messrs. Fitschen and Jain took over in mid-2012. Large shareholders have been pressing the duo to boost profitability.

As part of that process, Deutsche Bank will implement a cost-cutting program to reduce annual costs by €3.5 billion ($3.8 billion), on top of the current program designed to strip €4.5 billion in expenses. The bank also lowered its targeted return on equity, a gauge of profitability, to at least 10% by 2020. It previously aimed at 12% by the end of next year.

On Sunday, the bank said that legal costs halved its first-quarter net profit to €559 million because of a record $2.5 billion charge to settle rate-rigging allegations with U.S. and U.K. authorities. Mr. Jain, who headed the investment bank at the time the manipulations took place, acknowledged on Monday that the scandal took “an enormous toll” on the bank. Mr. Jain said he is now taking the responsibility to ensure “that this is not going to happen again.”

Separately, U.S. securities regulators said Monday that they need another two weeks to decide whether Deutsche Bank should be able to continue issuing stocks and bonds without regulatory review. In pleading guilty to criminal charges in the U.S. case, the bank became ineligible to quickly issue securities without a waiver from the Securities and Exchange Commission.

On Monday, Deutsche Bank said it would shave about €200 billion in assets from the investment bank, which will see €800 million in disposal costs and a €600 million drop in annual revenue, Deutsche Bank strategy chief Stefan Krause told analysts.

The bank will focus on reducing activities with hedge funds, some lending businesses and certain trading activities that have become less profitable amid new regulations. Also, it will boost assets in other areas of the investment bank, targeting increases of about €50 billion to €70 billion.

Deutsche Bank also aims to reduce its retail-banking operations by floating a majority stake in its Postbank unit on the stock market by the end of next year, once it has squeezed out minority shareholders who still hold about 3% of Postbank. But if “we’re getting a good offer for Postbank, we will have to consider it,” Mr. Jain said.

The bank will also cut the number of its own retail branches by roughly 200, from 700, while investing up to €500 million in the unit’s digital technologies. That is about half of the overall €1 billion in investments into Deutsche Bank’s digital technologies.

The lender will keep its European retail-banking network with branches in Italy, Spain and other countries, contrary to widespread speculation.

Cutting back at its investment- and retail-banking arms is set to help Deutsche Bank improve its capital adequacy, which trails rivals. The lender aims to improve its leverage ratio, which compares loss-absorbing capital with total assets, to 5% from 3.4%, while keeping its equity ratio stable at 11%.

One area of investment will be two rather small units. Deutsche Bank will invest more than €1 billion in its global transaction-banking unit and expand the balance sheet of its asset- and wealth-management unit by up to 10% a year until 2020.

The lender will release further details of the revamp in the next 90 days. Closely watched will be the number of potential job cuts and the future of Deutsche Bank’s nearly 20% stake in Chinese commercial lender Hua Xia Bank Co. Ltd., which it may sell.

WSJ