By Hans Seidenstuecker, Christopher Thompson, and Tom Sims
Deutsche Bank is understood to be planning to overhaul its trading operations by creating a so-called bad bank to hold tens of billions of euros of non-core assets. The overhaul — first reported by the Financial Times — will also include shrinking or shutting equity and rates trading businesses outside of Europe.
The bad bank would house or sell assets valued at up to €50bn — after adjusting for risk — and comprising mainly long-dated derivatives. The measures are part of a significant restructuring of the investment bank, a major source of revenue for Germany’s largest lender, which has struggled to generate sustainable profits since the 2008 financial crisis.
It is trying to turn itself around, but has faced hurdles such as allegations of money laundering and failed stress tests. Its attempt to create a German champion through a merger with Commerzbank failed in April.
In May, Deutsche chief executive Christian Sewing promised shareholders “tough cutbacks” at its investment bank. Deutsche said that it was “working on measures to accelerate its transformation so as to improve its sustainable profitability. We will update all stakeholders if and when required”.
The effort by Mr Sewing marks a further shift by the German lender away from investment banking to focus on more stable forms of revenue, such as transaction banking. The bank is planning cuts at its US equities business, including prime brokerage and equity derivatives, to win over shareholders unhappy about its performance.
Deutsche created a similar division for non-core investments in 2012 with €128bn in risk-weighted assets. Deutsche wound up the unit four years later, in 2016. The question is how much this would cost. A big restructuring charge would push the bank into the red again, and forcing Mr Sewing to raise more capital.
It’s hard for outsiders to know what other horrors lurk in Deutsche’s €1.4tn balance sheet. Cuts will further dent morale at the investment bank, making it harder to retain staff. Wholesale lenders would take a dim view of Deutsche once again failing to meet its lowball target of a 4% return on tangible equity, pushing up its borrowing costs.
An economic downturn would push up bad-debt charges. Ongoing investigations may also lead to new fines.