Investment Banking

New Year, New Deutsche Bank

  • Why it matters

    Why it matters

    Deutsche Bank has fewer legal and regulatory issues to resolve and can focus more on its future strategy.

  • Facts

    Facts

    • Deutsche Bank said last week it has agreed a tentative $7.2 billion settlement with the Department of Justice over mortgage miss-selling.
    • It still faces legal action over its Russian business.
    • A memo sent by Deutsche Bank to its sales teams says the bank has found no evidence that it violated U.S. sanctions when some of its employees in Moscow helped Russians move money out of the country.
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    Audio

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A fresh start for Deutsche's John Cryan. Source: Bernd Roselieb for Handelsblatt

The Deutsche Bank board plans to meet in January to revise the current strategy, sources told Handelsblatt.

The bank wants to move forward, even though it still has not come to an agreement with the U.S. over its trades in Russia.

The focus on strategy comes days after the bank reached a verbal agreement with the U.S. Justice Department, to pay a penalty of $7.2 billion (€6.9 billion) for its role in miss-selling mortgages.

The prevailing sentiment among investors and the bank alike was one of relief. The Justice Department had initially demanded $14 billion, a sum that bank would not have been able to pay without a fresh injection of capital, and a figure that sent the Deutsche Bank share price to a record low in September.

The Russian legal suit is the other big case that Deutsche Bank chief executive John Cryan wants to resolve as soon as possible, but sources said the bank does not expect to reach an agreement on it before Donald Trump takes over as president next year.

A memo sent by Deutsche Bank to its sales teams says the bank has found no evidence that it violated U.S. sanctions when some of its employees in Moscow helped Russians move money out of the country.

Deutsche Bank’s top executives had avoided the subject of strategy until now, because they wanted to see how much capital the bank would have left over after paying all outstanding penalties, and Russia was seen as particularly unpredictable legal risk.

Now the bank is regaining hope. A memo sent by Deutsche Bank to its sales teams says the bank has found no evidence that it violated U.S. sanctions when some of its employees in Moscow helped Russians move money out of the country. This would be good news, because sanctions violations carry especially stiff penalties.

The bank was unwilling to comment on this information but sources said the board believes any possible penalties will be manageable, and the bank can get to work on its new strategy without waiting for a final settlement.

Ingo Speich, a portfolio manager at Union Investment, one of the bank’s top 20 investors said the Russia case could still be dangerous for the bank, but added that Mr. Cryan should seize the moment. “John Cryan has a good reputation on the capital markets and should have the courage to adjust the strategy now,” he said.

The board has been working on various scenarios for weeks. Sources said options include both a possible reintegration of the Postbank subsidiary, which is currently up for sale, and a partial withdrawal from the U.S. market.

Deutsche Bank’s investment bankers will be expected to further reduce their risks and the complexity of their business. Instead of costly and capital-intensive, customized solutions, Mr. Cryan wants bankers to offer clients a sort of modular system.

Deutsche Bank also intends to withdraw from a number of smaller markets. In terms of its trading activities, the bank has already cut back its relationships with about 3,400 clients, because its business with these customers was not sufficiently profitable.

At the same time, the bank wants to keep its main businesses and would only sell its jewels like Deutsche Asset Management in an absolute emergency.

This now seems to have become less likely, as the bank is now capable of shouldering the financial burden of the mortgage miss-selling penalty. The $3.1 billion fine will impose a burden of €1.2 billion in the fourth quarter, with the remainder coming from funds the bank had already set aside. JP Morgan estimates that will only reduce the bank’s equity ratio by 0.3 percent.

Deutsche Bank must also come up with $4.1 billion, but this amount consists of “relief for consumers,” which it must provide over a five-year period. This means that it will have to reduce the financial burden on property owners by either extending the terms of their mortgage loans or reducing their interest burden. If the bank does this in a creative way, it can achieve this effect without actually paying the total amount. In the case of Goldman Sachs, for example, the financial burden resulting from a similar penalty ended up being less than a fifth of the disclosed penalty.

Deutsche Bank was penalized more severely than Credit Suisse, which on Friday was ordered to pay €5.3 billion for its transgressions in the mortgage market. In return, however, Mr. Cryan and the rest of the board can now turn to the future.

 

Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. Michael Maisch is the deputy chief of Handelsblatt’s finance desk and based in Frankfurt, Germany’s financial capital. To contact the author: osman@handelsblatt.com and maisch@handelsblatt.com

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