The days when Deutsche Bank competed internationally with the top dogs on Wall Street may be nearing their end.
Germany’s largest financial institution is considering a partial withdrawal from the U.S. investment banking market, part of an effort to raise capital to meet its massive legal risks, sources familiar with the matter have confirmed to Handelsblatt.
The U.S. pullback is part of a drastic expansion of the bank’s existing restructuring plans that has been discussed by the bank’s executive board. Other banking operations, including its retail business in Italy and Spain, could also be on the chopping block.
The measures remain merely in the planning stages, according to sources, but one thing is clear: Deutsche Bank’s top brass is painfully aware that there can no longer be any taboos when it comes to nursing the troubled bank back to financial health.
The new restructuring plans come as the U.S. Justice Department has threatened Deutsche Bank with a $14 billion fine (€12.5 billion) for junk mortgage-backed securities traded in the run-up to the 2008 financial crisis.
A partial withdrawal from the U.S. investment banking market could help Deutsche Bank negotiate a lower settlement with the Justice Department, according to Handelsblatt sources in the financial industry.
When news of the looming U.S. fine first broke, Deutsche Bank shares went into a nose-dive, temporarily hitting a new record low of €9.90 per share.
Since acquiring New York's Bankers Trust in 1999, Deutsche Bank has risen to become one of the most influential financial institutions in the United States.
Though the final penalty is expected to be much lower, investors are concerned that the bank will need additional capital to meet its legal risks. Some have feared a public or private bailout may be necessary.
Deutsche Bank has set aside €3.5 billion so far for the U.S. case. It also faces hundreds of other regulatory investigations and lawsuits, including a money-laundering investigation in Russia that could prove equally damaging.
“A withdrawal from the trade in the U.S. would free up capital that the bank urgently needs to meet the goals that it has set for itself,” one major investor told Handelsblatt.
Deutsche Bank currently has a capital buffer of 10.8 percent, but chief executive John Cryan wants to boost the firewall to 12.5 percent. The fine in the United States could undermine Mr. Cryan’s goal.
A complete withdrawal from investment banking in the United States, however, is out of the question. The market has become too important for Deutsche Bank.
Since acquiring New York’s Bankers Trust in 1999, Deutsche Bank has risen to become one of the most influential financial institutions in the United States and a top investment bank around the world.
But it has fallen behind again in the past few year – even before the latest revelations of a pull back. While Deutsche Bank currently remains Europe’s largest investment bank, it has tumbled out of the world’s top five, which is dominated by U.S. firms.
The bank’s top management is also considering a withdrawal from the retail banking markets in Italy and Spain as well as more layoffs across the board, according to information obtained by Handelsblatt.
As part of its efforts to reduce costs, Deutsche Bank has already announced 9,000 layoffs, including 4,000 in Germany. Deeper cuts could hit its North America operations.
At the end of June, Deutsche Bank had 101,000 employees. That includes about 10,000 employees in North America and 70,000 in Europe, including 45,000 in Germany, according to figures from the end of 2015.
Deutsche Bank is also looking for alternatives to the sale of its retail subsidiary Postbank.
Originally scheduled for this year, the spinoff has been postponed until 2017. Yet a sale after the New Year also looks increasingly unlikely, due to difficulties finding a buyer amid mistrust toward Europe’s troubled banking sector.
One possible alternative is for Deutsche Bank to sell Postbank shares to anchor investors who could benefit from Postbank’s network. Mr. Cryan was never a fan of selling Postbank because of the advantages the subsidiary brings in the retail banking sector.
One way or another, Deutsche Bank will have to raise enough money to meet its legal risks in the United States. The German government has ruled out rescuing the institution if it proves unable to pay for the Justice Department penalty on its own, according to a Wall Street Journal report.
A German government representative reportedly told parliamentarians that the rules have changed since the 2008 financial crisis and a bailout like the one Commerzbank received is now “unthinkable.”
Commerzbank, Germany’s second-largest financial institution, received an €18-billion bailout in the wake of the financial crisis and the government still has a 15-percent stake in the bank.
Handelsblatt has reported that Germany’s private sector may be willing to step up to rescue Deutsche Bank in an emergency.
Michael Maisch is the deputy editor of Handelsblatt’s finance section in Frankfurt. To contact the author: firstname.lastname@example.org