Exclusive: Deutsche Bank mulls retail float, tie with foreign banks - source

By Kathrin Jones and Thomas Atkins

FRANKFURT (Reuters) - Deutsche Bank is considering splitting off its retail division and listing it on the stock exchange should German lawmakers approve measures forcing banks to isolate risky trading activities, a person with knowledge of the discussions said.

Under this scenario, Deutsche would keep investment banking and asset management while floating its retail operations in stages, in the hope of joining forces with a foreign partner willing to do battle in Germany’s highly competitive market for consumer banking, the source said.

Deutsche Bank said: "We have been transparent that the bank will review and update its strategy over the course of the coming year. It is irresponsible to speculate on the sale of any business."

The considerations are at a purely theoretical stage, the source said, and being undertaken in case regulators impose restrictions that erode incentives for a big investment bank like Deutsche to maintain full ownership of a retail chain.

In Berlin, a source close to the federal government said Deutsche has been "very, very busy" lobbying for a watered-down version of a draft German law requiring divisions between banks’ risk- and deposit-taking operations.

Some German lawmakers regard the law as essential to rein in banks whose market bets helped to bring about the 2007-2009 financial crisis in which taxpayers bailed out lenders at huge expense.

One possibility was to sell part of Deutsche's retail operation to a large foreign partner alongside a stock market flotation, said the source with knowledge of the discussions, who declined to be named because he is not authorized to speak to the media.

Discontent has risen among Deutsche's shareholders as its share price has lagged those of other major investment banks and it falls far short of its profit targets, which were already watered down once in 2014.

Germany’s largest lender began a strategic review earlier this month, saying it would examine its business lines and profit targets. The bank has not ruled out selling its Postbank-branded retail unit, which it bought in steps starting in 2008.

A top 10 shareholder, who declined to be named, said a Postbank sale made sense, in part because Deutsche no longer needs access to its large deposit base.

"We would welcome a Postbank sale. The bank was bought in a time when liquidity was scarce. That’s no longer the case today. Today, the important thing is trimming back and getting fit," he said.

MOVING TARGET

In public, the bank has said that its strategy of offering a wide range of products worldwide was correct. "We've always been very, very clear to emphasize that the global, universal bank model is what we consider to be the right one for us," co-Chief Executive Juergen Fitschen said on Germany's N24 television station on Wednesday.

Under the scenario being discussed, a flotation would allow a foreign bank to buy a stake, joining forces in one of Europe' most competitive retail banking battlefields, the source said.

The euro zone's largest bank, Spain's Santander, and French flagship BNP Paribas could be possible participants in the flotation, strengthening their positions in Europe's largest economy, the source said. Both banks declined to comment.

A bank official said it could make sense to sell down the group’s retail exposure gradually in a way that raises capital while reducing the group’s exposure to Germany’s brutally competitive retail market.

It would also distance the risk-taking investment bank from the deposit-taking retail operation, a move some regulators may welcome as a means of protecting retail clients.

No concrete decisions have been made, the first source said.

A spokesman for the finance ministry said the government was considering moves to bring German regulations closer to those being debated at the European Union level.

The EU is considering a law that would force banks to separate trading activities above a certain size so their collapse in any future market meltdown wouldn't hurt customer accounts. But some proposals call for the proposal to be watered down.

(Reporting by Kathrin Jones and Thomas Atkins in Frankfurt, and by Gernot Heller and Matthias Sobolewski in Berlin; Editing by Arno Schuetze, Kirsti Knolle and David Stamp)