Deutsche Bank Credit Risk Rises as Review Fuels Funding Concerns

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Deutsche Bank Co-CEOs Anshu Jain and Juergen Fitschen
Co-Chief Executive Officers Anshu Jain and Juergen Fitschen, who took over the bank three years ago, are leading the review to boost returns and capital levels. Photographer: Ralph Orlowski/Bloomberg

Deutsche Bank AG bondholders are concerned that a sale of the retail business to concentrate on investment banking would deprive Germany’s biggest lender of deposits it needs for funding and increase risk for creditors.

Investors demand a yield premium of 83 basis points over benchmark rates to hold Deutsche Bank’s 1.5 billion euros ($1.6 billion) of senior bonds due March 2025, according to data compiled by Bloomberg. That’s up from a spread of 55 basis points when the notes were issued last month.

Deutsche Bank is reviewing its business and will probably opt to exit all or part of consumer operations in a strategy revamp to be announced as soon as this month, a person with knowledge of the situation said last week. Investors are concerned that the move would sacrifice the steady cash flows generated by consumer banking.

“Deutsche Bank disposing of its retail business and becoming a pure investment bank would be negative for bondholders,” said Paul Smillie, a Singapore-based analyst at Columbia Threadneedle Investments, which manages about $200 billion in fixed-income assets globally. “They would have more volatile returns, a greater reliance on wholesale funding and a riskier profile.”

The 28 basis-point increase on Deutsche Bank’s yield premium compares with an average rise of 11 basis points to 48 basis points for senior bank bonds, according to Bank of America Merrill Lynch index data. Credit-default swaps insuring the lender’s debt rose to 78 basis points, the highest level this year, according to data compiled by Bloomberg.

Review Outcome

Deutsche Bank will share the outcome of its review in the second quarter, said Frankfurt-based spokesman Klaus Winker, declining further comment. The company will announce its first-quarter earnings on April 29.

Co-Chief Executive Officers Anshu Jain and Juergen Fitschen, who took over the bank three years ago, are leading the review to boost returns and capital levels.

Employees at Deutsche Bank’s Postbank unit voted this week in favor of striking indefinitely, escalating protests as they seek job protections amid the review that may lead to the division’s sale.

“Management’s stated priority is to sustain profitability and strengthen shareholder returns,” Simon Adamson, an analyst at CreditSights Inc. in London, wrote in a note last week. “It is unclear how much bondholders’ interests will be taken into account in the strategy review.”

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