Per a Financial Times article, Deutsche Bank DB is mulling to make cutbacks in the U.S. equities trading business, including prime brokerage and equity derivatives. The bank would create a ‘bad bank’, a measure used by failed U.K. banks post the 2008 financial crisis.
The newly-formed unit would hold tens of billions of Euros of assets worth around €50 billion as the bank’s chief executive officer (CEO) Christian Sewing is trimming its investment banking division. This includes Sewing’s plans to shrink or shut down the equity and rates trading businesses outside continental Europe completely, and focus on the core transaction banking and private wealth management business.
Per the source, the proposed non-core asset unit will comprise long-dated derivatives. These derivatives, which come under the purview of stringent regulations post the financial crisis, have become a burden for the bank’s struggling balance sheet, and are, therefore, planned to be kept under the non-core asset unit.
The German bank’s planned divestiture of the assets is unlikely to hit its profit or capital due to the non-toxic nature. However, better-performing bond trading business and currency-trading operation will be retained by the bank.
The newly-comprised non-core unit will include non-strategic assets unlike its prior bad bank which held more loss-making and toxic assets. From 2012 through 2016, Deutsche Bank had a non-core unit, with around €125 billion in risk-weighted assets, which recorded a cumulative pre-tax loss of €14.6 billion during the period. On dissolution of the bad bank, about €10 billion of assets were merged with the core businesses.
The proposed changes are expected to be announced with the bank’s six-month results in the second half of July.
In addition, assets level of the non-core unit “continues to oscillate”, but around €30 billion of risk-weighted assets, with a final size of €40-€50 billion is projected, per the source. Notably, the final size would represent approximately 14% of Deutsche Bank’s balance sheet.
“The cuts need to be radical,” said one senior figure at the bank. “It makes sense for us to put all these long-term, nil-revenue assets in a non-core unit,” also mentioned the official. The person further added, “We now have the capital and liquidity freedom to do what needs to be done; we couldn’t have acted decisively much sooner because we needed to have built up those buffers.”
“As we said at the AGM on 23 May, Deutsche Bank is working on measures to accelerate its transformation so as to improve its sustainable profitability. We will update all stakeholders if and when required,” Deutsche Bank noted in an e-mailed statement.
Deutsche Bank faces pressure to trim its investment banking division, following the collapse of merger talks with domestic rival Commerzbank. Though Deutsche Bank’s restructuring efforts, including cost-saving measures, look encouraging, it is difficult to determine how much the bank will gain, considering the prevalent headwinds. Furthermore, dismal revenue performance is another concern.
Deutsche Bank currently carries a Zacks Rank #4 (Sell).
Shares of Deutsche Bank have lost around 21.9% on the NYSE, in the last six months, as against the industry’s growth of 2.8%.
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