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Deutsche edges closer to Postbank sale, but must walk fine line


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Deutsche edges closer to Postbank sale, but must walk fine line

With the prospect of an end to a long period of ultralow interest rates, and bank shares rising, Deutsche Bank AG might be inching closer to off-loading its retail banking unit, but the need to avoid a loss might mean a sale comes later rather than sooner.

Acquired in stages between 2008 and 2012, Deutsche Postbank AG has never delivered the returns Deutsche hoped for, and in April 2015, the group said it would look to divest the business as it refocuses on investment banking and seeks to boost capital ratios. But a lack of attractive bids and market volatility sparked speculation in late 2016 that the plan, key to the bank's 2020 strategy, might be delayed or abandoned.

Postbank CEO Frank Strauss told Handelsblatt on Jan. 20 that with interest rates set to edge upward, the outlook for his bank is improving. This should make it easier to sell, especially if Postbank also manages to cut costs, Bankhaus Lampe analyst Neil Smith said.

One way to do this would be for Deutsche to first float up to 49% of Postbank on the stock market, thus establishing a valuation while keeping majority control and potentially allowing it to negotiate a higher price when selling off the rest of the unit later, Smith said in an interview, adding that such a process could take 12 to 24 months.

"The two-step process is ideal for Deutsche because they get the benefits of the IPO immediately, which gives them the opportunity to wait until someone offers a proper price," Smith said.

Selling Postbank by the end of 2017 would help Deutsche's capital ratios as new leverage requirements come into force. But the need to avoid a loss on the disposal might make this impossible, said Michael Huenseler, a Munich-based credit portfolio manager at Assenagon.

Postbank's book value under international accounting standards known as IFRS stands at about €3 billion, after Deutsche revised it down by €3.5 billion in 2015. This is probably still more than a sale would generate, Michael Teig, an analyst with UniCredit Research, said.

To make matters worse, no adjustment to Postbank's value has been made under the German accounting standards used to determine whether Deutsche can pay interest on its hybrid Additional Tier 1 bonds. Concerns over Deutsche's ability to pay the coupons on this risky form of debt, which banks have been pressed into issuing by regulators keen for them to have a supply of liabilities which can be written off in an emergency, triggered a credit market selloff in early 2016.

On the positive side of the ledger, Deutsche's sale of a stake in China's Hua Xia Bank Co. Ltd. should boost the available distributable items used to determine whether interest on the AT1s can be paid, allowing the next round of payments to go ahead, Teig noted in an interview. Deutsche should also be able to adjust Postbank's German accounting book value closer to an expected sale price during 2017 and 2018, he said.

Such obstacles to a quick sale stand in the way of Deutsche's hopes of ridding its balance sheet of Postbank's assets, as it strives to keep its leverage ratio well north of the 3% minimum set to become binding as of 2018. The bank's ratio stood at 3.5% at the end of the third quarter, when Postbank's assets were €141.2 billion, compared to €1.69 trillion for the group as a whole.

In terms of risk-weighted assets, which are used to calculate Deutsche's common equity Tier 1 ratio, Postbank contributes €44.8 billion out of the group's €385.3 billion total. Deutsche had a CET 1 ratio of 11.1% as of the end of September 2016.

In order to improve its CET1 to more market-friendly levels, Deutsche would need around €6 billion, Credit Suisse analyst Jon Peace said in an interview.

Seeking to boost its capital, Deutsche is also thinking of options for selling a 25% stake in Deutsche Asset Management, including a potential IPO, Handelsblatt has reported. The bank has long said the profitable division will not be sold.

A spokesman for Deutsche declined to comment on the group's plans for Postbank.

Analysts forecast the bank will announce 2016 losses of €1.5 billion in the red after settling U.S. charges over mortgage bond misselling. It also recently agreed a settlement of $425 million and £163 million with U.S. and U.K. authorities over money-laundering violations related to so-called mirror trades carried out on behalf of Russian clients.

The lender should also provide data on the money it has available for AT1 coupons when it announces its results Feb. 2. A strategy update is due in the spring.