Deutsche Bank Profit Boost Seen Needing More Than Postbank SaleElena Logutenkova and Shane Strowmatt
Deutsche Bank AG’s plan to revive profit by selling its Postbank consumer unit and shrinking the securities unit may not go far enough.
“Nobody has blamed Deutsche Bank’s poor performance for the last six years on Postbank,” said Roy Smith, finance professor at New York University’s Stern School of Business, who has suggested the company should split its investment bank from the rest of the businesses. “This isn’t going to make anybody very happy.”
After paying a record $2.5 billion fine for rigging Libor, co-Chief Executive Officers Anshu Jain and Juergen Fitschen are implementing their biggest strategic overhaul since being appointed three years ago. The lender plans to cut ownership of Postbank to a minority stake, it said late Friday. While no details of other plans to boost profitability have been disclosed, Deutsche Bank said it will reduce assets at the investment bank and cut back overseas operations.
“When Deutsche Bank acquired Postbank it was all about synergies and a sale creates no synergies,” said Christopher Wheeler, a London-based analyst at Atlantic Equities LLP. “This could be an expensive retreat.”
Jain and Fitschen need to win over investors, as concern about the firm’s legal costs and capital buffers made the stock the worst performing among global peers under the co-CEOs’ tenure.
They set a target in 2012 of boosting the company’s after-tax return on equity to at least 12 percent in 2015. That objective was pushed back by one year after Deutsche Bank sold stock to boost capital in May. The measure of profitability stood at 2.7 percent last year and the company hasn’t said whether it’s changing the target as a result of the strategic review, details of which are planned for release on Monday.
Deutsche Bank plans to cut its holding of Postbank to below 50 percent by selling shares in the lender to the public, said a person with knowledge of the review, who asked not to be identified because the details are private.
Deutsche Bank spent a total of more than 6 billion euros acquiring stakes in Postbank, which reached about 94 percent in 2012. The acquisition helped the company diversify its funding mix by boosting consumer deposits after the global financial crisis. The acquisition also more than doubled the number of the bank’s consumer clients in the fragmented German market. Financial rewards had been slower to achieve.
Postbank’s return on equity, including corporate-center capital and costs, stood at 4 percent last year, according to Barclays Plc analysts. That compares with 5 percent for the rest of Deutsche Bank’s German consumer-banking business and 13 percent for its retail businesses abroad.
Still, Postbank is just a small part of the group. Last year it contributed 11 percent of total revenue and 13 percent of pretax profits.
The biggest profit generator is the investment bank. There, Deutsche Bank plans to cut about 150 billion euros of assets that are included when calculating the lender’s leverage ratio, according to a person with knowledge of the matter. This would mean a reduction of about 18 percent, according to JPMorgan Chase & Co. analysts’ estimates.
“We will need more details about the deleveraging of the investment bank, but the first indications suggest that prime services and certain structured rates and credit are the first to be chopped,” said Alevizos Alevizakos, an analyst at Keefe Bruyette & Woods in London. “Deutsche Bank wants to exit the illiquid segments of the market.”
Jain and Fitschen have sought to keep a fully-fledged investment bank and consumer-lending unit, even as higher capital requirements hurt profitability. They raised cash from investors last year to bolster returns from debt trading by taking market share from rivals exiting the market.
While the investment bank’s pretax profit rose 12 percent last year from its 2012 level, the unit’s return on equity after tax remained at 9 percent for the past three years as the bank boosted capital for the business.
The investment bank probably did well in the first quarter, when Deutsche Bank said it posted near-record revenues, according to analysts. The company will post a profit for the quarter even after setting aside 1.5 billion euros in legal reserves. The bank will publish full earnings statement on Sunday.
“The investment bank is doing well,” said Guy de Blonay, who manages about $880 million in financial stocks at Jupiter Asset Management Ltd. in London and doesn’t hold Deutsche Bank shares. “Shareholders would want the bank to focus on businesses that are doing well. But the issue is really more about capital. The regulatory environment means the investment bank may not be adequately capitalized while litigation reserves have shrunk and need to be replenished.”