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Deutsche Reserves $1.1B to Meet Derivatives Offloading Costs

Zacks Equity Research

Per a Reuters article, Deutsche Bank DB has made provisions of about $1.1 billion to meet the costs involved with divesting its derivatives unit.

The motive behind this restructuring is to create a bad bank that will consist of about €288 billion of unwanted assets, including equity derivatives and long-dated interest rate and credit derivatives.

The article said that the German lender will offer equity derivatives book for sale in an auction over the next couple of months, which reportedly had spiked interest of U.S. and European banks. Post this, the bank will be making an attempt at offloading long-dated interest rate and credit derivatives.

However, per the article, Deutsche Bank is unlikely to earn satisfactory returns from this sale. This is because these assets are generally less attractive to buyers as they generate low returns in exchange of high levels of capital investment.

The bank seeks to reduce assets in the capital release unit to €119 billion by 2019-end and to €9 billion by 2022.

This move forms part of the bank’s major overhaul plan that involves axing about 18,000 jobs while offloading unprofitable businesses. In July 2019, it had announced some major restructuring plans and fresh set of targets it seeks to achieve by 2022 without raising additional capital.

Though Deutsche Bank is expected to incur net loss in second-quarter 2019 due to restructuring costs, these overhaul efforts might bear fruit thereby improving long-term profitability.

The stock has lost 8.5% on the NYSE in the past six months compared with the industry’s decline of 5%.

Deutsche Bank currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the finance space are Bank of Montreal BMO, Credit Agricole SA CRARY and BanColombia S.A. CIB. All these stocks carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Bank of Montreal has been raised slightly for the current year in the past 60 days. The company’s share price has gained 10% so far this year.

Credit Agricole has witnessed stable earnings estimates for 2019 in the past 30 days. Its share price has risen 6.2% so far this year.

BanColombia’s shares have gained 21.8% so far this year. Its earnings estimates for 2019 have moved up slightly in the past 60 days.

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