future scenarios

Deutsche Bank’s playbook of possible options

Decisions about the future
Not changing course yet, though. Source: Getty

Germany’s largest bank is ailing, roiled by years of excess, foreign adventures, mismanagement, wrongdoing and fines. On its third chief executive since 2012, even with its new boss, its share price is still low.

So last weekend, managers considered ways out of this rumbling crisis. Their conclusions differed slightly from those of analysts who crunched numbers independently. Options spanned a merger, a takeover, a withdrawal from global banking to focus only on Germany – and also a plan for if the bank’s financial situation continues to deteriorate.

A possible merger of Deutsche and Commerzbank has been in the headlines recently after media reported the banks’ bosses were mulling a tie-up. The rumor boosted Deutsche’s share price. But German bank mergers haven’t done well in the past, and the CEO of Deutsche, Christian Sewing, said his bank would need 18 months before it could consider such a step.

Beyond linking up with CoBa, as it is known in Germany, Deutsche Bank’s managers also looked into whether a merger could also work with a European bank, Handelsblatt learned from participants.

Contingency plans

They also looked at possible avenues if the bank’s financial situation worsens further. In this case, they would radically scale back investment banking, the managers concluded.

By the close of the weekend, the bankers had decided to stick with their current strategy. So for now, despite the difficulties in keeping the share price even above €10 (see chart), the bank will continue to make modest cutbacks in investment banking to bring the lender back on track. That was Mr. Sewing’s promise to investors: cutbacks in Asia and the US, and in investing, to achieve a 10 percent return on tangible equity by 2021.

But analysts say that Deutsche isn’t moving fast enough, noting that income is falling faster than costs. Citigroup analyst Andrew Coombs sketched out a more radical proposal, to withdraw completely from the US and from the equities business. This would see the bank focus solely on German retail and business customers. The trouble with that scenario is it won’t fly without fresh capital; Mr. Coombs said withdrawing could cost up to €3 billion ($4.1 billion) plus a further €2.5 billion for restructuring.

Crunching the numbers

He likewise calculated whether it could make sense for Germany’s biggest bank to take over Commerzbank. Financially, it could, he decided, if Deutsche paid 0.8 share of its own equity plus €4 cash for each share held by Commerzbank shareholders. In the long term, that would cut costs and potentially raise Deutsche’s share price 60 percent by 2020. But Mr. Coombs said the problem with this scenario is the high risk in its implementation: Deutsche Bank is busy trying to integrate Postbank, a troubled subsidiary, and reducing investment activities.

The execs at Deutsche Bank’s weekend meeting at least clarified some personnel questions. They gave a five-year extension to Garth Ritchie, who heads the investment banking business. But they postponed decisions on Nicolas Moreau, who leads the bank’s asset management business, and Werner Steinmüller, board member in charge of Asia business. Both of those calls will be made by the supervisory board in October, according to a spokesperson.

If only the biggest question could be answered so easily: whether and when Deutsche will reverse its trailing fortunes.

Daniel Schäfer leads Handelsblatt’s finance coverage. Michael Maisch is deputy of the finance desk and Yasmin Osman is a banking correspondent for Handelsblatt. Allison Williams, deputy editor of Handelsblatt Global, adapted this story into English. To contact the authors: d.schaefer@handelsblattgroup.com, m.maisch@handelsblattgroup.com, y.osman@handelsblattgroup.com

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