will fight tohold on to its prized asset management division despite increasing pressure toshore up its capital position, experts say.
Frankfurt-basedDeutsche, one of the world's most highly levered banks with a vast holding ofrisky assets, had a common equity Tier 1 ratio of 10.8% at the end of June. Itmust raise this to 12.25% by January 2019 in order to satisfy minimumregulatory requirements, but a potential $14 billion fine for missellingmortgage bonds has stoked market fears that it will struggle to do so. Itsshare price has halved over the last year, and the German government isreported to be secretly working on a rescue plan.
The$14 billion figure, initially demanded by the U.S. Department of Justiceas a penalty for its misselling of RMBS ahead of the 2008 financial crisis, islikely to be materially lower as the two parties negotiate. But Deutsche hasbeen taking steps to bolster capital anyway. The sale of Abbey Life for closeto €1 billion, agreedto in late September, will increase CET1 by about 10 basis points.
Somefund managers cited in the U.K.mediahave suggested that the bank could also sell its asset management division,which could fetch as much as €8 billion. But observers say CEO John Cryan willavoid selling this business if at all possible.
A last resort
Sucha move would be "a last resort approach," according to Jerôme Legras,managing partner of Paris-based Axiom Alternative Investments. He told S&PGlobal Market Intelligence that Deutsche Asset Management is "really theirbest business right now, with significant size" and that selling it would "hugelydeplete earnings." Christopher Wheeler, a bank analyst at AtlanticEquities, said in an interview that it is a "vitally importantbusiness" to Deutsche, describing it as capital-light, very low risk, anda source of high returns on equity.
The division delivered a €334 million net profit for thefirst half, with management fees totaling €1.08 billion and total net revenuescoming to €1.40 billion, although all these were lower than the prior year. Thebusiness played a key role in Cryan's 2015 redesign of the bank, tapping institutional investors andhigh-net-worth individuals as low interest rates squeezed lending margins, andstricter capital rules gnawed at the securities division.
Cryanhimself has made it clear that he wants it to remain part of Deutsche's future.On Sept. 12, he wrote to employees to make it "unambiguously clear thatDeutsche Asset Management is, and will remain, an essential part of [thebank's] business model."
Wheeler also said he thought selling it would be an"absolute last resort," but pointed out that it is much faster to getdue diligence done on an asset manager than on a part of the bank.
The need for speed
Speed may be of the essence, as the bank is facing furtherlitigation — ongoinginvestigations concern offsetting equity trades in Moscow and London, and thealleged manipulation of foreign-exchange and LIBOR rates — and struggling toretain profitability. First-half consolidated net profit totaled €256 million,down from €1.38 billion a year ago, with total net revenues tumbling 21%.
Theextent of the market worries were reflected in a Sept. 28 report in Die Zeit that the German authorities arepreparing a bailout in case it cannot solve its capital problems itself, aswell as in news that Deutsche had been assessing a potential tie-up with .
StefanMueller, who runs Frankfurt-based brokerage DGWA, said in an interview that hethinks Deutsche may fork into a London-based investment bank and a Germanretail and corporate bank, with the latter potentially merged with Commerzbank.
"Withoutthat dominant investment banking focus, [the asset management division's]business [would] be therefore a key unit in this 'new' Deutsche Bank," hesaid. The unit is still a market leader, he noted.
Deutsche Asset Management's new head, Nicolas Moreau,took the reins in theweek of Oct. 2, succeedingformer BlackRock executive Quintin Price, who began in January but went onmedical leave in April and left the company in June. Moreau, who recentlyheaded AXA France and will be based in London, will try to invigorate thedivision, which saw net outflows of €9 billion in the second quarter prompted,it said, by "sustained low global growth and volatility from the U.K.[Brexit] referendum."