Deutsche Bank CEO’s Hedging of Italian Risk Shows Germany Is the Priority

When Josef Ackermann called on lenders to help bail out Greece last month, the Deutsche Bank AG (DBK) chief executive officer had already cut his potential losses from the crisis spreading to Italy and Spain.

Five days after lenders agreed to back the Institute for International Finance’s plan to accept losses on their holdings of Greek debt, the Frankfurt-based bank said it reduced its risks linked to Portugal, Italy, Ireland, Greece and Spain by 70 percent in the first half. In Italy, the lender cut its exposure to 996 million euros ($1.4 billion) from 8.01 billion euros.

The decision helped the bank to escape losses on Italian bonds, which have since slumped on speculation the country will struggle to finance its deficit. It prompted an investigation by Italy’s securities watchdog and has also opened the bank to criticism it helped undermine confidence in the country. That may damage the lender’s franchise in a country where households save more than other Europeans and pay higher bank fees.

“The signal was that Deutsche Bank thought Italian bonds would fall,” said Dirk Becker, an analyst with Kepler Capital Markets in Frankfurt who recommends that investors buy Deutsche Bank shares. “The image of a committed bank may have taken some damage from local businesses and politicians.”

Italian bonds have given investors a loss of 5.8 percent since the end of June and Spanish bonds a 2.5 percent loss, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German government bonds earned 4.6 percent in the same period, the data show.

‘The Right Thing’

Ackermann “did the right thing -- prices fell and they were hedged,” said Kepler’s Becker. “Risk reduction is logical and part of a bank executive’s job.”

Deutsche Bank cut exposures it took on as part of its acquisition of Deutsche Postbank AG (DPB), Chief Financial Officer Stefan Krause said on a July 26 conference call. In a letter to Italian daily Corriere della Sera published on July 29, Deutsche Bank’s top executive in Italy, Flavio Valeri, said most of the reduction happened in the first quarter and wasn’t linked to the turmoil that swept European markets at the end of July. A spokesman for the bank confirmed the contents of the letter.

The difference in yield, or spread, between Italian 10-year bonds and similar-maturity German debt surged 147 basis points to 333 basis points in July and reached a euro-era record of 389 basis points Aug. 4. The spread for Spanish notes rose by 112 basis points in July. A basis point is 0.01 percentage points.

‘Message’ to Investors

“Deutsche Bank’s buying of protection would have impacted on Italian spreads both because of the transactions themselves and the message it sends to other investors,” said Giorgio Questa, a finance professor at Cass Business School in London and a former banker. “Investors watch what Deutsche Bank does in the fixed-income market.”

Deutsche Bank took on Postbank’s exposures at market value, Ronald Weichert, a company spokesman, said by telephone. The lender holds the majority of its remaining peripheral exposures on its trading book, he said. Valeri and Ackermann, through their spokesmen, declined to be interviewed for this article.

Banks pledged on July 21 to participate in a bond exchange and debt buyback program as part of a new rescue package for Greece. The lenders will voluntarily agree to write down the value of their Greek securities by an average 21 percent as part of the plan.

“The private investor community will benefit from a more stable financial and economic environment,” Ackermann said in a July 21 statement issued by the IIF. “This offer can contribute substantially to improving the competitiveness of the Greek economy.”

‘Two Levels’

Ackermann, 63, mediated between banks and lawmakers as they wrangled over the role for investors in the bailout.

“There have always been two levels at Deutsche Bank -- one where the CEO is involved in talks with political leaders and the operating level where they have to maneuver a situation,” said Manfred Jaisfeld, a National Bank AG analyst in Essen, who recommends investors buy Deutsche Bank shares. “Hindsight is 20-20, but Deutsche Bank has shown that compared to competitors, they’re better at recognizing risks ahead of time.”

Ackermann counseled German Chancellor Angela Merkel on the rescue of property lender Hypo Real Estate Holding AG in 2008, and stood beside Finance Minister Wolfgang Schaeuble on June 30 in Berlin to announce an agreement by banks and insurers to roll over Greek debt holdings.

“I know it’s always said that I had a special advisory relationship,” Ackermann said in an ARD television interview broadcast in August last year. “I didn’t. I always told Mrs. Merkel clearly that I am primarily a Deutsche Bank employee and cannot give advice against the interest of Deutsche Bank. One shouldn’t do that and can’t do that.”

Rome Bond

Deutsche Bank started in Italy in 1883, when it helped to underwrite a bond sale for the city of Rome and introduced the securities to the Berlin stock exchange, according to its website. The lender, which opened an office in Milan in 1977, had 274 Italian branches and about 2.9 million customers at the end of March.

The bank remains committed to the Italian market and has recently approved a 270 million-euro capital increase for its local unit, according to Valeri. The lender plans to open about 30 branches and recruit more than 200 financial advisers in Italy this year, and has increased credit lines for customers in the country by 25 percent in the last 18 months, Valeri wrote.

‘Active in Italy’

Italy accounted for 48 percent of the 1.7 billion euros in revenue from Deutsche Bank’s retail operations outside Germany, which focus on wealthy clients, the company said in a presentation posted on its website in June. The country was the largest contributor in a group including India, Belgium, Portugal, Poland, Spain and China.

Italian households saved a gross 14.2 percent of their gross disposable income in 2007, more than the 10.8 percent average of the 27-member European Union, according to the bloc’s statistics office in Luxembourg. Italy and Spain “have the most costly accounts in the EU,” according to a 2009 report on consumer current account prices for the European Commission.

“They’re very active in Italy and it may have damaged their image slightly, but their image has benefited from their financial strength,” said Christian Hamann, an analyst with Hamburger Sparkasse who recommends investors hold Deutsche Bank stock. “It is more important to make a solid impression than to be seen as just being fair.”

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net Edward Evans at eevans3@bloomberg.net

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