Deutsche Bank is preparing an in-depth restructuring of its trading activities, including the creation of a so-called bad bank, holding tens of billions of euros in assets, while the managing director, Christian Sewing, is moving away the main lender of Germany's investment bank.
The plan would target the wrong bank or sell assets valued by the German lender in its accounts up to 50 billion euros after adjusting for risk.
Deutsche's stock and rate trading activities outside of continental Europe will be sharply reduced or fully closed as part of the redesign, although the final decision is pending, according to four people informed of the plan. Managers are also ready to unveil a new focus on banking and private wealth management.
The proposed bad bank, known internally as the non-core asset unit, will include mainly long-term derivatives, officials said.
Mr. Sewing is likely to announce the changes with the bank's half-yearly results at the end of July.
The final scale of the non – essential unit has not yet been decided and the number "continues to oscillate", but the leaders are discussing at least 30 billion euros from the end of the year. risk – weighted assets of any size between 40 and 50 billion euros. people said. At the top, it represents 14% of Deutsche's balance sheet.
"The cuts must be radical," said a senior bank official. "It makes sense for us to put all these long-term assets, zero on income, into a secondary unit."
He added, "We now have the capital and liquidity to do what needs to be done; we could not have acted decisively much earlier because we needed to build these pads. "
The lender said in a statement: "Deutsche Bank is working on measures to accelerate its transformation in order to improve its sustainable profitability. We will update all stakeholders if necessary. "
The Deutsche Investment Bank has weighed on results in recent years and recorded losses in the last two quarters. In addition to a series of fines for misconduct scandals, the poor performance of its core business drove the bank's share price to its lowest level in 149 years. The sentiment clouded in April when the merger with Commerzbank, which is the subject of much rumors, collapsed.
The lender is targeting a return on tangible capital – a measure of profitability – of at least 4% this year, a level below that of most of its rivals. But it only generated a return of 1.3% in the first quarter. None of the analysts who cover the group have expected that he can achieve his goal without major structural changes.
"Mr Sewing must be decisive," said a senior European politician. "The time of gradual change is over."
Three people familiar with the plan said any idea that Paul Achleitner, the bank's president as a progressive reformer, would be a drag on Sewing's restructuring was out of date. "We all know that it must be radical," said one of them.
Although derivatives for non-core units still provide some cash, all the profits generated by the transactions – and therefore the associated bonuses for those who settled them – were recorded in advance.
Since the instruments were put in place for the first time, they have become a major drag on the bank's capital due to their more stringent treatment under new regulations introduced after the financial crisis, say those informed of the crisis. plan.
Now that the bank has 260 billion euros of cash and similar securities, it no longer relies on these assets to generate cash flow and can attempt to deplete them or sell them to investors. 39; other banks subject to lower financing costs and fund pressures, or to private equity investors eager to recover them at a discount, said one of the people.
The German bank expects to be able to sell the assets without a fatal blow to its earnings or capital, as long-term interest rate derivatives are non-toxic and have a predefined run-off plan, said one of the people.
The bank will retain its best performing bond trading – ranked in the top five worldwide by the Industry Watch Coalition – and its foreign exchange trading business regained second place in the Euromoney FX survey. 'last year.
Shareholders sitting on painful losses have been stepping up the pressure since the stock fell below € 6 for the first time this month, down 40% last year.
Last year, JPMorgan estimated that Deutsche's US operations were losing 25 cents per business dollar and that its global equity business alone was losing about 600 million euros a year.
One of the reasons the bank has been waiting for such a long time before making these changes is the fear of closing much of the stock and corporate rates at the bottom of the cycle, people said of the plan.
Informed people on the plan said that the new non-core unit mainly comprised non-strategic assets and would be different from the previous bad bank, which contained much more toxic assets and generating losses. From 2012 to 2016, Deutsche used about 125 billion euros of risk-weighted assets, including a $ 4.3 billion Las Vegas casino, picked up after the developer's failure, resulting in a cumulative pre-tax loss of 14.6 billion euros. during the period. When Deutsche dissolved the Bad Bank, the remaining 10 billion assets were reintegrated into the core businesses.
However, investment banking activity in Europe remained anemic and the European Central Bank indicated that interest rates would remain negative for much longer than expected, which means that the l & # 39; Waiting was no longer an option for Deutsche.