Losing Saudi Arabia

Choppy Waters for Deutsche Bank

SaudiArabia-Banks-GettyImages
A potential deal with Saudi Arabia's Aramco could provide a massive boost to Deutsche Bank – but would also come with more political headaches.
  • Why it matters

    Why it matters

    Deutsche Bank hopes Middle Eastern politics will not derail lucrative business, as the last of the LIBOR scandal plays out in British courts.

  • Facts

    Facts

    • The Saudi national oil company Aramco may be partially floated. It is thought to worth a possible $10 trillion.
    • Unlike some competitors, Deutsche Bank has a profitable Saudi subsidiary.
    • In April 2015, Deutsche Bank paid a total of $2.5 billion in fines in connection with benchmark interest rate fixing.
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    Audio

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One recent piece of banking news has had an electrifying effect in global financial circles.

Saudi Arabia was said to be considering floating part of Aramco, the state-owned national oil producer, on the stock exchange. If it were to happen, this could be the biggest deal of all time. Analysts estimate Aramco’s value at anything up to $10 trillion.

Even if only a fraction of that figure were to come to market, it would still be a dream deal for any investment banker. No wonder speculation has already begun as to which bank might underwrite the prestigious flotation, should it take place. News agency Bloomberg reported at the weekend that, alongside JP Morgan and HSBC, Deutsche Bank also had hopes of winning the commission.

Such is the predicament of Deutsche Bank these days, however, that even good news seems to turn to bad. Taking the Aramco deal has turned from a financial bonanza into a very tricky job, given increasing international criticism of Saudi Arabia in the wake of the mass execution it carried out at the beginning of the year.

The questionable deal comes as Deutsche Bank has been working hard to improve its reputation since new co-chief executive John Cryan took the helm in July, despite a raft of legal investigations that continue to dog the bank. Included among these is a trial set to begin in London against employees involved in the LIBOR rate-fixing scandal, it was announced Monday.

Deutsche Bank is also desperate for new sources of revenue. A deal with Saudi Arabia would mark a major boost to Deutsche Bank’s business at a time Mr. Cryan is demanding deep cutbacks to the bank’s global operations.

“2015 was a record year for us. The possibilities here are wonderful. International banks have only scratched the surface.”

Jamal Al Kishi, Head of Deutsche Securities, Saudi Arabia

The investment banking arm of the Frankfurt-based bank is only in fifth place in the Middle East and Africa, based on total revenue. But the bank has already worked for the Saudi oil giant, for example when the German chemical company Lanxess moved its synthetic rubber business into a new joint venture with Aramco.

Deutsche Bank would not comment on its latest involvement in Saudi Arabia. But the bank’s website does say that the company is “widely recognized for its leading role in some of the most prestigious transactions.”

Deutsche Bank’s involvement in the country goes back nearly a decade. Since 2006, the bank has had a subsidiary in Saudi Arabia, offering a full spectrum of service offerings.

“2015 was a record year for us,” said Jamal Al Kishi, head of Deutsche Securities in Saudi Arabia in a December interview with Bloomberg. “The possibilities here are wonderful and international banks have only just scratched the surface.”

This optimism came before the political upheavals of early January. At the beginning of the year, Saudi Arabia surprised observers by executing 47 prisoners, among them the Shiite cleric Nimr al-Nimr. The mass execution led to the breaking off of diplomatic ties with Shiite-dominated Iran.

Since then, German relations with Saudi Arabia have also been under a critical microscope, including German business ties to the desert kingdom. The U.S. human rights organization Freedom House ranks the Saudi kingdom 12th in a list of the most unfree countries on earth.

Deutsche Bank is not the only German bank to have dealings with the Saudis. Frankfurt-based Commerzbank is another. But that company has emphasized that it is primarily involved in the financial settlement of import and export transactions. It insists that it has no direct commercial relationships with the Saudi government, and points out that it has no subsidiary in the country and no representation there.

 

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If politics might disrupt Deutsche Bank’s business in the Middle East, the fallout from an old scandal is still resonating in London. On Monday, 11 bankers were brought to trial, charged with fraud for their role in the so-called EURIBOR affair: the widespread manipulation of benchmark interbank lending rates between 2005 and 2009.

Of the 11 charged in the latest round of prosecutions, the majority are current or former Deutsche Bank employees. Foremost among them is Christian Bittar, a former star trader at Deutsche Bank.

Six of the accused, including Mr. Bittar, were at Westminster magistrates’ court in London for a bail hearing. Strict bail conditions were demanded. Mr. Bittar must put up £1 million (about €1.3 million), whereas the others in court were bailed at between £50,000 and £100,000, and given strict conditions, including the surrender of passports.

The case was referred to a higher court, with a date for the trial itself to be established later this week. Mr. Bittar was represented by Alexander Cameron, the brother of the British prime minister.

Five of the accused were not in court, including four former Deutsche Bank employees: Andreas Hauschild, Jörg Vogt, Kai-Uwe Kappauf and Ardalan Gharagozlou. Explaining their absence, their lawyers cited other legal investigations currently taking place against them in Frankfurt.

Of 11 people charged in the latest round of prosecutions, the majority are current or former Deutsche Bank employees.

The Serious Fraud Office has now brought cases against a total of 23 people in the LIBOR and EURIBOR affairs. One of these, Tom Hayes, a former UBS and Citigroup trader, was last year sentenced to 11 years in prison. The British authorities have not as yet confirmed if they will put out a European arrest warrant against those who did not appear in court, with a view to extradition. A spokesperson for the fraud office said the matter is under review.

They are thought likely to seek extradition, but with little chance of success. “Given the proceedings in Frankfurt, it seems unlikely that the German citizens will be extradited,” said Frank Meyer, an expert in international law at Zürich University.

A number of the accused have said they are innocent and will strongly contest the charges. This includes Mr. Bittar, who worked at Deutsche Bank in London until 2011.

Mr. Bittar was one of the bank’s most lucrative traders, said to have earned the company more than €500 million in 2008. This earned him a bonus of almost £90 million (about $130 million), according to documents from the British and American regulatory authorities. After leaving Deutsche Bank, Mr. Bittar worked for the hedge fund Bluecrest in a number of locations, including Singapore, before leaving in the summer of 2014.

In April 2015, Deutsche Bank was fined $2.5 billion in connection with the rate-fixing scandal, which involved employees in its London, Frankfurt, New York and Tokyo offices. In a deal worked out with British and American authorities, the bank agreed to dismiss a number of employees and its London-based subsidiary admitted to criminal wire fraud.

Numerous other large financial institutions have been fined in the United States and Britain for their role in the scandal. UBS paid a fine of $1.5 billion, while Barclays was forced to pay $450 million. Other companies penalized include Lloyds, JPMorgan, Citigroup and ICAP.

 

Michael Maisch is the deputy chief of Handelsblatt’s finance desk in Frankfurt. Laura De La Motte is an editor at the Handelsblatt finance desk and a specialist banking correspondent. Katharina Slodczyk is Handelsblatt’s London correspondent. To contact the authors: maisch@handelsblatt.com,  delamotte@handelsblatt.comslodczyk@handelsblatt.com

 

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