Cryan's Choices

Selling the Family Silver Won't Fix Deutsche

John Cryan has no pain-free or easy way of bolstering capital.
At Closing, April 25th
11.98 EUR

John Cryan faces some unpalatable choices as he tries to plug Deutsche Bank AG's multi-billion euro capital shortfall.

Deutsche's Decline

Shares of Germany's biggest bank have tumbled over the past five years

Source: Bloomberg

The CEO's options include a rights offering that would dilute investors, asset sales that could deprive it of future revenue, or job cuts that risk driving key talent away. He appears to be avoiding one decision by going for a more limited combination of all three. That's understandable -- but not without its own risks.

The latest reports suggest Deutsche Bank is considering is a partial sale of its $800 billion asset-management unit. The division's new head, AXA veteran Nicolas Moreau, is reportedly open to a partial IPO of the business in Luxembourg. Analysts value the whole operation at about 8 billion euros. Selling a quarter of it would, in theory, bring in precious cash without ceding control. It would also allow the venture to fund future investment itself.

Such an approach is certainly better than putting the whole business up for sale, which Gadfly has argued against before. But it comes at a cost.

It's not clear Deutsche would be able to get the valuation it wants, given the bank is under pressure to sell assets and trades at a discount to peers. Confusion over the bank's commitment to the unit might drive clients or staff away in the meantime. And Deutsche would be giving up a claim on one of its most lucrative businesses.

Family Silver

Return on tangible equity for the first nine months of 2016 in asset management versus the group

Source: Company filings

Considering the bank's overall capital shortfall could be as much as 4.3 billion euros ($4.6 billion), according to JPMorgan Chase & Co. analysts, the IPO proceeds alone are unlikely to fix the problem.

The move might make more sense as part of a wider self-help program designed to inflict a thousand cuts rather than just one. Deutsche recently scrapped the bonuses of top executives for a second straight year and slashed variable compensation for other senior staff.

Combining more austerity with limited restructuring might allow Cryan to play for time and limit the size of a future capital increase. With Deutsche Bank's key fixed-income markets rebounding strongly in a more volatile world, pressure for an immediate solution or complex overhaul -- similar to Unicredit SpA's revamp -- may ebb.

But there are downsides here, too. Squeezing compensation, however deserved, might still mean losing staff to rivals in a competitive market dominated by U.S. players. Selling chunks such as Postbank or part of asset management would make the bank less diversified and more exposed to an investment-banking business whose returns on equity are still weak. And muddling through has proven to be a recipe for pain in the past.

Playing for time may seem an attractive way out of making a tough and painful decision. But if competitors raise capital, strike mergers and snatch market share while Deutsche Bank plays defense, the long-term consequences could be just as problematic.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Lionel Laurent in London at

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