Deutsche Bank in crisis: three things to think about
Investors tire of Deutsche’s rollercoaster ride…
Top investors have begun to insist Deutsche Bank needs a rescue, even though it insists it doesn’t want one, following a week of turmoil in which its shares see-sawed and some hedge fund clients withdrew their business.
A government-backed bailout is seen as better than limping along, at the mercy of market panics like the one last week as low interest rates undermine its cashflow.
A top-ranking executive at a large asset manager said: “The share price says it all. The German government needs to act decisively. Until it does so the crisis will get worse.”
An investment banker added the German government could avoid a direct rescue by persuading German institutions to finance a bail-in: “But it needs to get off the fence and act.”
The German giant finished last week with its share price up 1.4% after reports it would settle a mortgage case with the US Justice Department for far less than feared. But it was quite a ride – hours before the shares were at a new low.
The bank has insisted no bailout is needed, with chief executive John Cryan saying the bank has “strong fundamentals”. The German government says it isn’t planning any rescue.
… prompting talk on what units could be sold or slimmed…
Deutsche Bank has various options open to it should it need to sell off assets in order to raise capital, according to analysts.
Talk of Deutsche raising cash by selling all, or part, of its asset management business has resurfaced, even though Cryan has ruled it out.
But if it wanted to raise cash to repair its balance sheet, Deutsche’s DWS German business is seen as a prime asset.
Four years after the bank dropped the idea of selling Rreef, its US property and infrastructure business, to Guggenheim Partners. People familiar with Deutsche say Rreef is not being put back on the block.
Divesting part of the investment bank – seen as its most troubled unit – would be problematic.
Octavio Marenzi, the Paris-based CEO of Opimas, said he wouldn’t be surprised to hear Deutsche start conversations about spinning out its investment bank – but the issue would be finding a buyer.
“I think they’ll bumble along, sell off pieces of the German retail banking arm and maybe get into negotiations with people about selling the investment bank or merging [it] with someone else. But I don’t think those conversations will go anywhere,” he said, adding that the bank will not collapse.
Chris Wheeler, banks analyst at Atlantic Equities, said it would be “very complex to sell the investment bank” and that the bank was likely to “focus more on the asset management business through an IPO or by distributing part of that business to existing shareholders”. He said that although the bank would not want to make such a move, “if push comes to shove that might be an option”.
… as the investment bank continues to struggle
Analysts agree Deutsche Bank still has strong assets – the problem is its lacklustre operations. And it is getting no reprieve from the woes at its investment bank.
Deutsche’s European investment banking business was once the region’s biggest in terms of revenue but Dealogic data shows that in the three months to September 30, it has fallen to third after experiencing its worst quarter since 2011. Its $171 million from capital markets and M&A work gave it a 5.3% share of the fee pool. It ranked fourth in the third quarter of 2015, but made more money and grabbed a slightly higher share of fees at 5.9%.
For four consecutive years from 2010, Deutsche topped the annual tables, until it was toppled by JP Morgan.
As JP Morgan analysts noted at the end of Deutsche’s agonising week, if the bank needs to raise capital now, it is more likely to be because of client revenues than US fines.
Wheeler of Atlantic Equities said the investment bank would not be immune from further cuts, saying: “Clearly the bank will be under pressure in many areas and revenues in the investment bank are almost certainly being negatively impacted by what is occurring. If that proves material, it will have the impact of making the CEO revisit the cost base in the investment bank, once again.”
• Written by Tim Burke, Lucy Burton and Mike Foster