Postbank Sale

Deutsche Bank's Next Act

DBank3 (2)
Passing the bank on?
  • Why it matters

    Why it matters

    If Deutsche Bank can convince investors that its plans to sell Postbank and to cut some operations are sufficient, it could boost its share price.

  • Facts

    Facts

    • Deutsche Bank’s Postbank has 14 million customers and 10,000 employees.
    • The bank on Friday said it would move to sell Postbank though a listing or outright sale.
    • The bank also announced plans to cut some operations abroad and to its investment and private banking operations.
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At the end, after months of wrangling, the vote was unanimous.

The supervisory board of Deutsche Bank on Friday night approved the struggling institution’s long-awaited new strategy that will radically trim the bank’s global aspirations to get leaner, meaner and hopefully, more profitable.

The restructuring is the most radical makeover since the bank’s current top management — co-chief executives Jürgen Fitschen and Anshu Jain, and supervisory board chairman Paul Achleitner — took over in 2012.

In a short, terse press release, Germany’s largest bank said it would sell the majority in Postbank, a chain of domestic retail banks located in the nation’s post offices that Deutsche had only acquired seven years earlier.

In addition, the Frankfurt-based institution announced unspecified plans to strongly reduce its investment banking and private banking operations, each wracked by underperformance in the post-crisis era.

The bank’s global holdings will also be sharply curtailed abroad, the bank said, without providing details, which it promised to give at a news conference on Monday in the German financial capital.

While details were scarce over the weekend, it appears certain that the strategic realignments could lead to significant reductions in top management positions across the board. Late Friday night, after the steps were approved by the supervisory board, the bank signalled plans to “realign the business model as well as the management and supervisory oversight to boost efficiency and create a more stable structure.”

With its short announcement, the new reality of Germany’s humbled financial powerhouse, founded in 1870 with a current 98,000 employees around the world, is now clear: The bank is certain to go through major changes, but its top managers are still clinging to their favored “universal” model of providing all possible finance services to all types of customers.

Exactly this kind of banking model has fallen out of favor in Europe since the financial crisis that nearly brought the global economy to its knees in 2008. Since the crisis, the new, tougher regulations imposed on global banks have made their lucrative investment and private banking activities less profitable, making it ever more difficult for them to sustain more costly retail operations.

Analysts who cover the financial sector now expect globally active banks to have a so-called leverage ratio — the proportion of a bank’s capital assets to its total balance sheet — of at least 4 percent. At the moment, Deutsche Bank’s leverage ratio is about 3.5 percent.

The bank's global holdings will also be sharply curtailed abroad, the bank said, without providing details, which it promised to give at a news conference on Monday in the German financial capital.

A month ago, the bank’s top managers favored an even more radical restructuring of Deutsche Bank, which has been hamstrung by a series of costly fines — most notably the record $2.5 billion penalty levied last week by U.S. and U.K. regulators for Libor currency rate manipulation.

Back then, many of Deutsche Bank’s top overseers wanted to cleave the giant institution, headquartered in two blue-glass towers in downtown Frankfurt into two, consisting of an investment bank and money manager, and a separate private banking institution.

But Mr. Jain, the former investment banker, and Mr. Fitschen, responsible for Deutsche Bank’s more bread-and-butter operations, were skeptical that either half could survive without a seamless link to the other.

They feared that the investment bank/wealth manager would have difficulty financing its operations, which are now supported by its retail depositors.

Supposedly some of the bank’s large corporate customers had also said they would prefer to work with a one-stop-shopping universal bank, raising the possibility that such a radical split could lead to lost clients.

In addition to the sale of Postbank, analysts expect Deutsche Bank to also sell its 20-percent stake in Chinese Bank Hua Xia, which currently has a market value of €3.3 billion.

 

Postbank WTB 2014 Deutsche Bank unit

 

But experts see the need for other urgent changes beyond the reductions in private banking operations and the sale of some foreign holdings and operations.

Kian Abouhossein, an analyst at J.P. Morgan, believes that it is necessary for Deutsche Bank to reduce its investment banking balance sheet by €115 billion — far more than the bank is now promising.

As the bank first began to consider restructuring options earlier this year, some within the German institution were also questioning whether cuts of €150 billion were necessary to downsize its ambitions and risks.

On Monday, the bank may also present new cost-cutting goals. Mr. Abouhossein is advocating cuts of €3.2 billion through 2017 to those operations of the bank that survive the current set of restructurings.

The bank was forced to make drastic moves because investors had lost faith in its strategy, performance and direction. Over the last year, Deutsche Bank’s share price has fallen by almost a third. Money raised through a €2 billion capital increase went in large part to pay a laundry list of fines, the legacy of the illegal behavior from the go-go pre-crisis era that haunts the bank today.

The bank’s return on equity was a meager 3 percent in 2014. Co-Chief Executives Mr. Jain and Mr. Fitschen promised shareholders a 12 percent return by the end of this year when they took over the helm in 2012.

Analysts see the restructuring and reforms as necessary, but not exactly adequate to guarantee the bank’s sustainable and profitable growth over the long term.

 

In addition to the sale of Postbank, analysts expect Deutsche Bank to also sell its 20-percent stake in Chinese Bank Hua Xia, which currently has a market value of €3.3 billion.

“The attempted sale or public listing of Postbank shows for one thing that the acquisition (seven years ago) was a failure,” said Philip Hässler, an analyst at Equinet. The bank’s new strategy, Mr. Hässler said, “is not ambitious. The capital markets had certainly favored the splitting of the entire private clients business. It is possible that investors will react negatively to this.”

 

Can Jain and Fitschen build the bank of the future? Source: DPA
Can co-chief executives Anshu Jain, left, and Jürgen Fitschen build the bank of the future? Source: DPA

 

A survey by a British analyst firm, Autonomous, of 49 Deutsche Bank investors found that nearly half favored the more radical restructuring — the one that the bank is not prepared to pursue. Only 29 percent of those investors favored the model the bank is now choosing.

Deutsche Bank will gradually reduce its ownership of Postbank through an initial public offering of its shares over the stock exchange, the German union Verdi, whose representatives sit on Deutsche Bank’s policy-setting supervisory board, said on Saturday night.

Analysts are also not convinced that Deutsche Bank will easily find a buyer for Postbank. For that reason, the bank will pursue the sale of individual stock shares first though an IPO, hoping to attract smaller investors. If that doesn’t work, the bank could make the split and award its existing shareholders with gratis new shares in the Postbank retail unit.

“The value of Postbank is difficult to estimate,” said Mr. Hässler from Equinet. “Based on the fundamentals alone, the share (of Deutsche Bank) in my opinion is not worth more than €25.”

Currently, the shares are selling for more than €33 each.

Based on that calculation, the market value of Postbank is currently about €7.1 billion. At €25 per share however, the value of Postbank would be only €5.5 billion. Currently, Deutsche Bank lists the book value — the bank’s own estimate independent of market value — of Postbank at €6 billion.

Under this scenario, Deutsche Bank would be looking at a write down in value of about €500 million. Analysts at France’s Societe Generale estimated that a “rational buyer” would only consider paying €3.5 billion for Postbank. If that were indeed the case, Deutsche Bank would have to write down the value of the retail bank it is selling by €2.5 billion.

Even under that painful scenario, the French bank believes that Deutsche Bank would only lift its leverage ratio by a mere 0.1 percentage points to 3.6 percent, a costly move that would bring it little relief.

But others think that the bank’s changes may indeed have the desired effect — signalling a serious, profitable reordering of priorities as it weathers a series of costly and embarrassing lawsuits that have dented its image. On Tuesday, Mr. Fitschen, the co-chief executive, will appear before a court in Munich at the outset of a criminal trial into the bankruptcy of a former Deutsche Bank client, the late media mogul Leo Kirch.

Mr. Fitschen has been accused of giving false statements during a civil trial brought by Mr. Kirch’s heirs, which he denies. At the time of the Kirch bankruptcy, Mr. Fitschen was a mid-level executive at the bank under then Chief Executive Rolf Breuer.

The trial is likely to last weeks, requiring regular appearances by the Deutsche Bank co-chief executive. The restructuring announced on Friday aims to give investors a light at the end of the tunnel, a sign that Deutsche Bank will weather this difficult chapter and emerge lighter, healthier and more profitable.

Investors until Friday evening seemed to believe in that argument. Shares of Deutsche Bank have risen about 25 percent this year, on the hopes that the bank would bite the bullet, and reload for a better future.

On Monday, when the markets open, the verdict will be rendered.

“The bank is up to its ears. There’ll be significant opposition at the shareholder meeting in May.”

peter grottian, professor, Free University, Berlin

The German government has also been watching Deutsche Bank’s plans with concern. While it does not have a financial stake in the bank, the government is eager to retain a German institution in the big leagues of global finance.

Industry observers were reserved about whether the Postbank sale would be a change that went far enough.

“It’s an absolute emergency situation; the bank basically doesn’t know how to handle all its different problems,” said Peter Grottian, professor for political science and finance at Berlin’s Free University.

Mr. Grottian said that selling Postbank would be a retreat from retail banking. “They want to withdraw from this area of business because it obviously doesn’t make enough money,” he said.

Postbank was simply a burden to Deutsche Bank, another expert said.

“In the current low-interest rate environment, the retail bank is making losses,” said Christoph Schneider, a professor of corporate finance at the University of Mannheim.

He questioned whether the sale made sense when interest rates rise again.

A sale would also reduce the diversity of banking services in Germany, Mr. Grottian said. “There’s a danger that Postbank would be sold off cheaply to another banking consortium and would be split up further,” he added.

 

Deutsche bank Volker Kannacher
The bank’s twin towers have defined the skyline of Frankfurt. Source: Volker Kannacher for Handelsblatt

 

 

Moving away from private customers could damage the bank’s reputation, according to Mr. Schneider. “Sure, Deutsche Bank’s reputation has suffered but it‘s a strong brand in Germany and abroad. It will lose political influence if it withdraws completely from dealing with private customers.“

Nor would a Postbank sale solve all Deutsche Bank’s problems, Mr. Grottian said.

“The bank is up to its ears. There’ll be significant opposition at the shareholder meeting in May. After all, they’ve been told all along that the bank will change its culture and its business model and that hasn’t happened,” he said.

“If you look at the fines they’re facing after the last few months, you can see the bank is really lacking leadership and its foundations are no longer solid,“ he added. “The bank doesn’t know what to do whereas at least other banks which have made a lot of mistakes have at least changed their business models, like Credit Swisse or UBS.”

During the financial crisis, Mr. Schneider recalled that the bank’s managers had argued that being a universal retail and investment business provided greater stability. Now, he said, the main issue was not whether to sell Postbank, but to create a sustainable and convincing business model.

 

Michael Maisch is deputy chief of Handelsblatt’s finance section in Frankfurt. Peter Köhler is a Handelsblatt editor who covers financial markets and institutions in Frankfurt and elsewhere. Allison Williams is deputy editor in chief of Handelsblatt Global Edition. Franziska Scheven is an editor at Handelsblatt Global Edition. To contact the authors: maisch@handelsblatt.com, koehler@handelsblatt.comwilliams@handelsblatt.comscheven@handelsblatt.com

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