NEW YORK (Reuters) – Some senior Deutsche Bank AG (DBKGn.DE) officials have discussed the possibility of putting additional problematic assets worth billions of euros into a unit it created earlier this year, if the bank is able to sell assets already held within that “bad bank,” according to three bank sources.FILE PHOTO: A man walks past an office of Deutsche Bank in Hanau, Germany, April 27, 2015. REUTERS/Kai Pfaffenbach
The discussions in recent weeks, which have not been previously reported, are preliminary, the sources said, adding that there is nothing imminent. A Deutsche Bank spokesman said the bank has no plans to add additional assets into the so-called capital release unit, or bad bank.
Nevertheless, it is one of the options that has come up for discussion at the highest levels at the bank, as executives grapple with the problem of having to turn around the bank on a tight budget, according to the three people familiar with the talks.
Deutsche Bank needs more capital to be able to absorb the losses that will likely come from shedding problematic assets, such as long-dated derivatives, that are still on its books, the people said.
But, after raising 29.3 billion euros ($32.3 billion) in capital over the past nine years, it does not have room to ask investors for more, the sources added.
For investors, still nursing a 75% fall in the bank’s share price over the past four-and-a-half years, it means that the road to recovery for the bank will most likely be long.
Christian Sewing, who took over from John Cryan in April last year, is looking to reshape Deutsche Bank after a multi-year bet on building a global investment banking business unraveled.
In July, he set up the bad bank, called a capital release unit (CRU), to house 74 billion euros of risk-weighted assets the bank had identified for wind-down or sale, part of a broader restructuring that will see 18,000 jobs go as it exits unprofitable businesses. Deutsche Bank set aside a 7.4 billion euro budget to fund the restructuring.
Some analysts have been skeptical whether the plan fully recognizes the extent of the problem assets still sitting on Deutsche Bank’s balance sheet. They remain particularly concerned about its exposure to Level 3 assets, which are the most illiquid and hard-to-value.
“It’s a partial clean-up,” said David Hendler, an independent analyst at New York-based Viola Risk Advisors. Hendler added that Deutsche Bank has 18 billion euros in hard-to-value assets on its balance sheet, which he estimated will take years to offload.
“They’re trying to paint a picture of progress but there’s still a lot of sludge in there,” he said.
Level 3 assets, which can include distressed debt and derivatives, are not necessarily loss making.
Deutsche Bank has said that the CRU’s focus is on releasing capital rather than ring-fencing toxic assets. In a memo to staff on July 8, Sewing described the assets within it as “high quality” and said most were of a short duration.
Only 30% of Deutsche Bank’s 25 billion euros worth of Level 3 assets have so far been placed within the capital release unit, according to a presentation the bank gave alongside its quarterly results in July.
The bank has tried to shed some of those assets, which include longer-dated derivatives, over the past three years. But it had little success because it was not prepared to take the writedowns the sales would have required, the sources said.
A sale of a financial asset can lead to a capital hit if the price is below what the bank values it at on its books, leading to a loss.
Deutsche Bank must stay within the budget it has set for its restructuring to avoid having to raise funds from investors, the sources said.
It set up the capital release unit with a view to shedding assets it could realistically find buyers for or wind-down in the next two to three years, the sources said. That, in turn, would free up capital to fund the sale of longer-term assets that will require bigger writedowns, the sources said.
Of the assets currently in the unit, Deutsche Bank plans to run a formal auction of its equity derivatives book as soon as this month, several sources familiar with the sale process have told Reuters. If those sales are successful, the bank could move more assets into the restructuring unit, the three sources close to the bank said.
Who would have thought that JPMorgan’s precious metals trading desk is the functional equivalent of the mafia, and that its one-time leader, Blythe Masters, was the mafia’s don?
Well, almost everyone who didn’t mind being designated a conspiracy theorist for years. And now comes vindication, because this has just been confirmed by the DOJ, which accused the PM trading desks at JPMorgan of being deeply involved in what prosecutors described as a “massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants.”
In an indictment unsealed on Monday morning, the DoJ charged Michael Nowak, a JPMorgan veteran and former head of its precious metals trading desk and Gregg Smith, another trader on JPM’s metals desk, in the probe. (Blythe Masters was somehow omitted).
“Based on the fact that it was conduct that was widespread on the desk, it was engaged in in thousands of episodes over an eight-year period — that it is precisely the kind of conduct that the RICO statute is meant to punish,” Assistant Attorney General Brian Benczkowski told reporters.
Here’s where it gets extra interesting: according to Bloomberg, the unusually aggressive language language embraced by prosecutors reminds legal experts of indictments utilizing the RICO Act – a law allowing prosecutors to take down ‘criminal enterprises’ like the mafia by charging all members of the organization for any crimes committed by an individual on behalf of the organization.
Prosecutors charged the head of JP Morgan’s global metals trading operation and two other traders with “conspiracy to conduct the affairs of an enterprise involved in interstate or foreign commerce through a pattern of racketeering activity” – language that is typically used to describe a RICO charge.
This hints at the possibility of a deeper prosecution for JP Morgan. Already, 12 people have been charged in the precious metals market-rigging conspiracy.
“We’re going to follow the facts wherever they lead, whether it’s across desks here or at any other bank or upwards into the financial institution,” Benczkowski said.
It’s unclear what the DoJ is planning, but they’re clearly keeping their options open.
Circling back to the indictment, both Smith and Nowak were put on leave over the summer as the DoJ’s investigation neared its conclusion.
A third trader named in the indictment, Christopher Jordan, traded precious metals at JPM until he left in December 2009. He later traded precious metals at two other banks, Credit Suisse and First New York.
In a press release accompanying the indictment, Assistant Attorney General accused all three men of scheming to manipulate the precious metals market while potentially harming their bank’s clients.
“The defendants and others allegedly engaged in a massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants,” said Assistant Attorney General Brian A. Benczkowski. “These charges should leave no doubt that the Department is committed to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets.”
William Sweeney, the Assistant Director in Charge of the FBI’s New York Field Office, added that this manipulation likely impacted “correlated markets and the clients of the bank they represented.”
“Smith, Nowak, Jordan, and their co-conspirators allegedly engaged in a complex scheme to trade precious metals in a way that negatively affected the natural balance of supply-and-demand,” said FBI Assistant Director in Charge William F. Sweeney Jr. of the FBI’s New York Field Office. “Not only did their alleged behavior affect the markets for precious metals, but also correlated markets and the clients of the bank they represented. For as long as we continue to see this type of illegal activity in the marketplace, we’ll remain dedicated to investigating and bringing to justice those who perpetrate these crimes.”
According to Bloomberg, three other banks – Deutsche Bank, HSBC and UBS – agreed to pay $50 million (in total) to settle civil claims by the CFTC. Two former JPM employees who pleaded guilty and contributed evidence against their former colleagues that was used in the indictment.
“While at JPMorgan I was instructed by supervisors and more senior traders to trade in a certain fashion, namely to place orders that I intended to cancel before execution,” said one former trader John Edmonds during an October 2018 hearing after pleading guilty to commodities fraud and conspiracy, BBG reports.
The behavior dates back more than 10 years to 2009, according to chat logs that were shown in the indictment. The conversations exposed in the chat logs show just how blatant the manipulation was, and how little the traders did to conceal it.
One of the traders who participated in the chat shown above was Christian Trunz, who traded precious metals at Bearn Stearns before joining JP Morgan after the crisis. He told a federal judge last month that this type of behavior was openly encouraged on JPM’s trading desks for roughly a decade, and that other traders taught him how to do it. He pleaded guilty to federal fraud charges on Aug. 20, BBG reports.
Another trader said during a plea hearing that he was instructed to bid up the price of futures contracts by placing, then cancelling, bid orders (the literal definition of spoofing) that he never intended to fill.
“I was instructed that if a client wished to sell futures I should simultaneously place both bids and offers with the intent of canceling the bids prior to execution,” Edmonds said during his plea hearing.
Edmonds said the purpose was to falsely transmit liquidity and price information in order to deceive other market participants about the supply and demand so they would trade against the orders that JPMorgan wanted to execute.
“We created market activity which artificially drove the sale price up and induced other market participants to purchase at an inflated price,” he said. Edmonds entered into a cooperation agreement with the CFTC in July.
Since the crisis, regulators around the world have cracked down on manipulation in rates, forex and government bond markets, so it’s not exactly a surprise that this type of behavior was also happening in precious metals. But the brazenness with which traders engaged in such manipulation suggests that they didn’t know what they were doing was illegal or wrong, which, in at least some cases, is probably true.
The aggressiveness of this manipulation probe is notable given that the government has lost the last two manipulation cases in court. The DoJ is trying to show that it is “undeterred and are becoming more, not less, aggressive” in cracking down on market manipulation.”
(ZH) Earlier this morning, there was an added wobble in European bond prices after an unconfirmed MNI report said the ECB could delay the launch of QE on Thursday and make it data dependent. While skeptics quickly slammed the story, saying it was just a clickbait by MarketNews…
… it does highlight just how sensitive the bond market is to an announcement of aggressive easing by the ECB when it meets on Thursday, Sept 12, where consensus generally expects a significant easing package, including a -20bp rate cut (followed by -10bp cut later on), coupled with roughly €30 billion in sovereign debt QE for 9-12 months, coupled with enhanced forward guidance.
The three package expectations (small, medium, large) by Goldman analysts are laid out below:
There is just one problem: while it is unclear if any further easing by the ECB will do anything to stimulate the Eurozone economy, one thing is certain – further easing will only cripple Europe’s banks. In fact, as Goldman writes in its ECB preview, “further rate cuts are a very uncomfortable prospect for the [banking] sector” and estimates that a -20bp cut could lead to an aggregate €5.6bn (-6%) profit cut for 32 €-banks under the bank’s coverage; worse, a further -10bp cut, as per GS macro forecasts, increases the hit to -10% (-€8.3 bn). Overall, 19 banks in Goldman’s coverage face a >10% EPS cut, and 8 banks face as much as a 20% EPS hit.
Then there is Europe’s head on collision with a recession: the weakening rate outlook has been accompanied by >20% fall in €-bank shares (SX7E) since 2H18 and -4% cuts to their consensus Net Interest Incomes (for 2020E). According to Goldman, so far ~40% of the share price decline could be explained by NII cuts; the rest falls into the ‘other’ domain, “where political risk features notably.”
Here is the problem in one sentence, and chart: since negative rates were intorduced in 2014, European Banks have paid €23BN to the ECB!
So to avoid a further banking sector, deterioration Goldman warns that “it’s critical that tiering accompanies further rate cuts if a large profit hit for the sector is to be avoided. A -20bp cut could lower €-banks EPS by ~6%. A tiering with efficiency on par with SNB scheme could offset ~30% of the hit.”
So the big question for Thursday is whether the ECB will also introduce rate tiering at the same time as it eases more.
On this topic, Goldman economists note that the implementation of the ECB’s new scheme is likely to be structured based on a multiple of minimum reserves held by individual banks (SNB model) or on a fraction of their actual excess reserve holdings (BOJ). Their baseline assumption is a two-tiered system, with one tier remunerated at the MRO (currently 0%), similar to minimum reserves, and a second tier charged at the prevailing DFR. They expect c. 50% of excess reserves to be priced at the DFR level.
In Goldman’s view, tiering is a critical part of any incremental easing package. As we have argued before, without it, an extremely challenging operating environment becomes worse, and may push an increased number of banks towards breakeven, or even loss-making territory. However, not all tiering is the same, and the schemes currently in use vary greatly in the extent of the offset/relief they provide to banks.
Key questions for bank investors ahead of the ECB meeting revolve around these following issues:
1. Could ECB’s tiering efficiency be on par with the Swiss or Japanese approach? The Swiss-like approach to tiering is Goldman’s baseline scenario (where c. 60% of deposit balances are exempt from negative rate), but it offers less relief for banks compared to the Japanese approach (>90%).
2. Would tiering be applied to the incremental cut (-20bp) only, or the full -60bp? In other words, would the tiered rate be set at the level of the MRO (0%) or lower. In our view, an offset for the entire -60bp is key. Goldman estimates that a scheme with efficiency on par with a ‘Swiss model’ with a relief applied retrospectively to a full negative rate (-60bps) has scope to shield ~⅓ of a fully-loaded impact of a 20bp rate cut for the Euro area banks under our coverage.
If rates on aggregate fall by -30bp, we calculate that the ‘tiering shield’ would be closer to 25-30% of the aggregate hit. It’s also important to note that even with tiering a 20-30bp rate cut is ultimately profit negative – when fully loaded. The relief it brings, however, is front-loaded leading to a near-term neutral impact for the aggregate.
In short: with the sellside analysts more focused on what the ECB will do to offset the adverse impact of its additional easing – as Europe inevitably careens to the reversal rate of roughly -1%, beyond which it’s game over for central banks – one wonders: just why is the ECB doing anything at all, if the biggest consideration is what it will do to offset the damage it creates by “fixing” things?
The ECB’s imposition of negative interest rates have created an “absurd situation” in which banks don’t want to hold deposits, rages UBS CEO Sergio Ermotti, arguing that this policy is hurting social systems and savings rates.
Ermotti is not alone. As European bank bosses cast their eyes at their share prices, they are fighting back, some have said – biting the hand that feeds, in their attack on ECB policies, warning of severe consequences to asset prices and the broader economy.
As Bloomberg reports, Deutsche Bank CEO Christian Sewing warned that more monetary easing by the ECB, as widely expected next week, will have “grave side effects” for a region that has already lived with negative interest rates for half a decade.
“In the long run, negative rates ruin the financial system,” Sewing said at the event, organized by the Handelsblatt newspaper.
Another cut “may make refinancing cheaper for states, but has grave side effects.”
While incoming ECB head Christine Lagarde has claimed that the benefits of deeply negative rates outweigh the costs (stating just this week that “a highly accommodative policy is warranted for a prolonged period of time;” few economists believe another cut at this level would actually help the economy. According to Sewing, all it would achieve is to further divide society by lifting asset prices while punishing Europe’s savers who are already paying 160 billion euros ($176 billion) a year because of negative interest rates.
“What’s really worrisome: central banks have hardly any tools left to effectively mitigate a real economic crisis,” Sewing said.
“They have already cranked open the money tap – most of all the European Central Bank.”
Who can blame Sewing, as the EU yield curve has collapsed, so has his share price…
“Banks’ interest margins are under pressure in this environment and that’s not going to change,” Commerzbank CEO Martin Zielke said at the same conference.
“I don’t think it is a particularly sustainable or responsible policy. But we have to recognize the facts and the facts are that winning clients in this environment helps work against that pressure.
Bloomberg also notes that Yngve Slyngstad, the chief executive officer of Norges Bank Investment Management, Norway’s $1 trillion wealth fund, has separately said that negative rates are the main worry at the world’s largest wealth fund right now.
So, with Draghi facing push back from an increasingly hawkish group of ECB members, the question is, will he just push off the decision? Starting October 31, how the Eurozone will be destroyed – whether with hyperinflation fire and deflationary ice – will no longer be Draghi’s decision, but instead the final destruction of the Eurozone will be delegated to arguably the most clueless person (see Argentina) in the room.
(IrishTimes) New rules over holiday entitlements and end to service awards for staff outside Germany
Deutsche Bank office in Venice
Deutsche Bank has angered an already nervous overseas workforce by tightening holiday rules and ending long-service awards for its 50,000 staff outside Germany.
A ban on carrying forward unused annual leave at the end of the year has been imposed with immediate effect, leaving workers little time to rearrange their holiday plans, while 10, 25 and 40-year service awards will be ditched from October.
“While these changes may be disappointing, we can assure you that we remain committed to offering competitive benefits and effective initiatives that support your health and wellbeing, enabling you to be the best you can in your professional lives,” Deutsche’s UK chief executive Tiina Lee and UK head of human resources Rachel Blanshard wrote in an email to staff.
According to its website, Deutsche Bank employs more than 650 people in Dublin.
The policy shift comes at a fraught time for employees of Germany’s largest lender, with 18,000 jobs set to disappear under one of the most radical investment bank restructurings since the global financial crisis.
It rankles particularly because it does not apply to Deutsche’s 41,000 employees in its home market, who can carry forward up to 10 days of holiday into the first three months of the subsequent year and will still receive service awards.
“There’s no loyalty at Deutsche any more,” said one senior overseas manager. “The cash awards are not massive but are nice to have. Between that and cutting back on carrying over holidays it really hasn’t helped the mood.”
The benefit changes are part of Deutsche’s “cost catalyst” initiative, according to the email, as reported by the Financial Times, and will help the bank reduce expenses as accounting rules force companies to build provisions for holiday entitlements that are carried forward from one fiscal year to the next.
One person familiar with the lender’s internal discussions said German employment law made it harder to change employee entitlements in the country retrospectively.
Deutsche’s sweeping shake-up announced just over a month ago is well under way. By the end of July, about 900 staff had been fired or given notice. One person briefed on the bank’s next steps said it was planning to step up job cuts significantly by the end of September.
Senior staff expect the axe to fall first on jobs in the UK and the US, where flexible employment protection laws and weak unions make it cheaper and easier to fire employees.
After filing charges against the bankers who allegedly masterminded the bond deals that seeded Malaysian sovereign wealth fund 1MDB with billion of dollars for ‘development’ purposes, and then the three Goldman subsidiaries – Goldman Sachs International, Goldman Sachs (Asia) LLC and Goldman Sachs (Singapore) Pte. – operating in the region where the scam was perpetrated, Malaysia’s muckraking attorney general Tommy Thomas is now going after 17 current and former Goldman directors.
The criminal charges are the latest step in Thomas’s crusade to recover the billions of dollars – with a face value of $6.5 billion – that were allegedly stolen from 1MDB by former Prime Minister Najib Razak and his inner circle.
The Goldman directors were being charged under Malaysia’s Capital Markets and Services Act, which has provisions that hold senior executives responsible for violations committed by their organizations.
“They occupied the highest executive positions in those three Goldman Sachs subsidiaries, and exercised or ought to have exercised decision-making authority over the transactions of those bodies corporate,” a statement from Thomas’s office read.
In response to Thomas’s announcement, a Goldman spokesman said: “We believe the charges announced today, along with those against three Goldman Sachs entities announced in December last year, are misdirected and will be vigorously defended.”
This is a major turning point in the investigation, and despite Goldman’s legal heft, it’s unlikely that these top bankers will get off scott free. Thomas is threatening criminal fines and custodial sentences, “given the severity of the scheme to defraud and fraudulent misappropriation of billions in bond proceeds, the lengthy period over which the offences were planned and executed…and the relative value of the fees and commissions paid to Goldman Sachs.”
The move marks an escalation in the Malaysian government’s investigation into 1MDB. But perhaps it’s just Malaysia’s most aggressive push yet to convince Goldman to give in to its demands to hand over $7.5 billion in reparations over Goldman’s role in the scandal.
Volvidos dois anos, Flint foi despedido de forma surpreendente. O HSBC está de novo à procura de um CEO e os dois gestores portugueses voltam a figurar nas listas que estão a ser noticias pelos media internacionais com os candidatos mais prováveis a assumir a liderança daquele que é o maior banco europeu.
A Bloomberg divide os potenciais próximos CEO em duas listas: os internos e os externos, assinalando que se a escolha vier de fora, será a primeira vez que tal acontece nos 154 anos de história do banco.
Nos internos estão Noel Quinn, administrador com o pelouro da banca comercial; Ewen Stevenson, que é CFO e veio recentemente do Royal Bank of Scotland; Charlie Nunn, que substituiu Flint à frente da unidade de retalho; e António Simões, que lidera a divisão de banca privada.
Diz a Bloomberg que o gestor português lidera a unidade de menor dimensão do HSBC, mas a experiência no banco (antes era o responsável da unidade no Reino Unido e Europa) pode ser um fator a seu favor.
Na lista dos gestores que não estão no HSBC, a Bloomberg inclui Piyush Gupta, CEO do DBS Group; e Horta Osório.
Sobre o gestor português, a Bloomberg destaca o programa de corte de despesas, pois estima que os custos atinjam 40% das receitas em 2020. “Tal torna-o um dos gestores mais eficientes da banca europeia”, o que vai ao encontro das prioridades de Mark Tucker. O chairman do HSBC também veio de fora do banco e agora pode querer o mesmo para escolher o CEO.
António Simões chegou em Setembro de 2007 ao ao HSBC, onde tem vindo a mudar de funções regularmente. Em 2015, chegou à presidência executiva do HSBC na Europa e do negócio do Reino Unido, para depois substituir Peter Boyles na liderança da banca privada global do grupo.
O processo de escolha do novo CEO não se adivinha fácil e no curto prazo. Segundo o Financial Times pode demorar seis meses.
Ronit Ghose, analista do Citigroup, disse ao jornal britânico que o cargo de CEO do HSBC será um dos mais difíceis da banca europeia, pois a instituição está mais exposta a tensões geopolíticas do que os bancos rivais. Com sede no Reino Unido, o HSBC tem uma forte presença no mercado asiático, sobretudo na China. “Será quase preciso um super-herói da Marvel para gerir o banco”, disse o analista.
Deutsche Bank is undergoing one of the most dramatic banking overhauls we have seen since the 2007-2008 financial crisis. So why is the lender, which was once touted as Europe’s answer to Wall Street’s titans, cutting back? CNBC’s Timothyna Duncan breaks down the bank’s history and its strategies to rebuild.
Deutsche Bank is reviewing whether it allowed confidential client data to be compromised by former employees who were laid off earlier this month, the Financial Times reported Sunday.
Approximately 50 former traders from Deutsche’s London and New York offices were able to access the bank’s systems and their emails in the weeks that followed the lender’s first round of layoffs, the newspaper reported. One individual formerly involved in equity sales sent around 450 messages via remote access after she was laid off, according to the report.
The internal probe, lead by the bank’s global compliance chief Jeremy Kirk, will seek to determine whether ex-bankers accessed price-sensitive data and whether current employees aided their former colleagues in obtaining such information, according to the report.
“Access to trading systems was turned off immediately for employees being put at risk of redundancy,” the bank told the FT. “A small number of employees continued to have access to their work emails through personal devices for a limited period.
“We have reviewed nearly all emails sent and have so far found no evidence of any price sensitive information being communicated or of any other wrongdoing,” the bank told the news outlet.
The troubled lender is in the process of eliminating some 18,000 positions, or roughly a fifth of its workforce, as it attempts to shed unwanted assets and overhaul its compliance efforts, FT said. As part of that effort, Deutsche is investing €4 billion in its internal controls and combining its anti-money laundering, risk and compliance functions, the newspaper said.
Deutsche Bank has, in recent months, been implicated in a series of financial crime scandals, including over its alleged role in handling money embezzled from the Malaysia state-owned investment fund 1MDB and over its purported failure to file suspicious activity reports linked to US President Donald Trump and his son-in-law Jared Kushner.
FRANKFURT (Reuters) – Deutsche Bank (DBKGn.DE) reported a bigger than forecast quarterly loss of 3.15 billion euros ($3.5 billion), underlining the challenges faced by Chief Executive Christian Sewing as he attempts to turn around the struggling business.
Germany’s largest bank had already flagged it would lose around 2.8 billion euros in the quarter when it announced a restructuring plan that will see 18,000 jobs go and cost 7.4 billion euros overall.
The size of the loss, compared with a profit of 401 million euros a year ago, prompted the bank’s shares to slide as much as 5.8% in Frankfurt before regaining some ground. The bigger loss stemmed from higher goodwill impairment charges than foreseen when the bank announced its restructuring on July 7.
As it reshapes, the bank expects to post a loss in 2019, meaning that it will have been in the red for four out of the past five years. But it is aiming for profit in 2020.
The bank also anticipates 2019 revenue to be lower than in 2018. That forecast marks a further scaling down in expectations from previous quarters.
Founded in 1870, the bank is considered one of the most important for the global financial system, along with U.S. heavyweights JPMorgan Chase, Bank of America and Citigroup.
But Deutsche has been plagued by losses and scandal, prompting it to embark on one of the biggest overhauls to an investment bank since the aftermath of the financial crisis.
CEO Sewing said on Wednesday that the bank had already taken significant steps in implementing the strategy. More than 900 employees had given notice or been told they would be made redundant from a bank that had around 91,500 employees.FILE PHOTO: The logo of Deutsche Bank is pictured on a company’s office in London, Britain July 8, 2019. REUTERS/Simon Dawson
In a note to staff, Sewing said that the lender’s underperforming investment bank faced “strong headwinds” in the quarter, including questions about the bank’s future that spooked clients.
“Now we can look ahead with more optimism,” he wrote.
TALE OF WOE
Deutsche’s troubles peaked with a $7.2 billion U.S. fine in 2017 for its role in the mortgage market crisis, in a major blow that caused clients to flee.
A new leadership, with Sewing at the helm since last year, has tried to revive Deutsche’s fortunes, but problems have persisted.
In April, the bank called off nearly six weeks of talks to merge with cross-town rival Commerzbank (CBKG.DE).
It then embarked on a plan for “tough cutbacks” to its investment bank, representing a major retreat from investment banking for Deutsche Bank, which for years had tried to compete as a major force on Wall Street.
Net revenue in the quarter fell 6% to 6.2 billion euros. Revenue at Deutsche’s cash-cow bond-trading division dropped 4% in the quarter, while equities sales and trading revenue dived 32%.
The declines underscore the continued weakness at the lender’s investment bank, which saw an 18% drop in net revenues during the period.
“I could make excuses,” about the division’s performance, Sewing told analysts. But “this simply doesn’t matter. We must do better and we will do better.”FILE PHOTO: The logo of Deutsche Bank is on display ahead of the bank’s annual shareholder meeting in Frankfurt, Germany, May 23, 2019. REUTERS/Kai Pfaffenbach/File Photo
RBC Capital Markets wrote that Deutsche’s earnings illustrated the “long road until we have visibility on the many stepping stones” to a turnaround.
Among details of the overhaul announced earlier this month, Deutsche said it planned to scrap its global equities business and scale back its investment bank. It also reshuffled management.
The bank will set up a new so-called “bad bank” to wind down unwanted assets, with a value of 74 billion euros of risk-weighted assets.
Reuters reported on Tuesday that it will take years to shed those unwanted assets, tying up capital that could have generated income of 500 million euros a year.
Preparations to auction unwanted equity derivatives are “well advanced”, the bank’s finance chief told analysts.
Some investors have said they doubted these moves would be enough to turn around its flagging fortunes in the face of intense competition and low interest rates.
Others investors have said they were worried Deutsche Bank would backtrack on a pledge not to tap shareholders for additional cash, particularly in view of its capital constraints.
“I really can’t say that I see the positives in this plan. I remain a bitter curmudgeon,” said Barrington Pitt-Miller, portfolio manager at Janus Henderson Investors.
(JN) A agência financeira decidiu subir o ratings da Caixa Geral de Depósitos, BCP, Santander Totta e Novo Banco perante a melhoria do cenário operacional no setor financeiro nacional.
A Moody’s decidiu subir os ratings dos depósitos da Caixa Geral de Depósitos, BCP, Santander Totta e Novo Banco. Isto perante a melhoria do cenário operacional do setor financeiro nacional, conforme justifica a agência de notação financeira numa nota emitida esta quarta-feira, 24 de julho.
Para o banco liderado por Paulo Macedo, a Moody’s aumentou o rating dos depósitos para Baa3/Prime-3, face aos anteriores Ba1/Not Prime, o que reflete a “melhoria do perfil macro [de Portugal] em conjunto com o progresso significativo do banco na implementação do plano estratégico 2017-2020”.
A mesma alteração foi feita no caso do BCP, que viu ainda o rating do programa de dívida sermelhorado de Ba1 para Ba2. O banco do Estado e o BCP passam assim a ter uma classificação dos depósitos num nível fora de lixo.
Já o rating do Santander Totta subiu para Baa1, enquanto antes era Baa2. Isto numa altura em que o banco liderado por Pedro Castro e Almeida conseguiu “fortalecer o perfil de crédito após ter concluído com sucesso a integração do Popular”.
Também o Novo Banco assistiu a uma melhoria do rating para B2 face a Caa1, com a agência de notação a destacar o progresso que o banco tem feito na redução do risco no seu balanço. O banco liderado por António Ramalho, que viu o seu “rating” melhorar em dois níveis, tem vindo a apostar na venda de carteiras de crédito malparado e imóveis.
Quanto ao BPI, a Moody’s aproveitou para reafirmar o rating dos depósitos no BPI, em Baa1/Prime-2. Mas também para colocar o rating do Montepio em análise para eventual subida. “O principal catalisador desta alteração do rating é a melhoria do cenário operacional do sistema bancário, em particular a desalavancagem significativa do setor privado”, afirma a Moody’s no comunicado.
A Moody’s melhorou o perfil macro de Portugal de Moderado para Moderado+. O rating está em estávem em Baa3.
Além disso, continua a agência, a alteração dos ratings dos bancos nacionais também reflete “o novo quadro legal que foi implementado em março de 2019” e que determina que os grandes depósitos em Portugal estão mais protegidos do que a dívida sénior no caso da resolução de um banco.
(BBG) At the heart of Chief Executive Officer Christian Sewing’s turnaround plan for Deutsche Bank AG is a contrarian bet: that he can cut spending on technology while gaining ground on the competition.
Even with the digital revolution in finance accelerating, Deutsche Bank expects to trim its annual outlays on tech to 2.9 billion euros ($3.3 billion) in 2022 from a peak of 4.2 billion euros this year.
“Deutsche Bank would probably love to be spending more on technology, but they need money for other parts of their restructuring,” said Pierre Drach, managing director of Independent Research in Frankfurt. “It’s pretty much impossible for European banks to catch up with the Americans at this stage.”
Sewing’s team says it’s made progress in fixing information networks that his predecessor called “antiquated and inadequate.” Years of expansion left it with systems that couldn’t communicate with each other and didn’t adequately track its business. The bank, which has spent almost $18.5 billion on legal settlements and fines since 2008, has also suggested that the past breakdown in controls stemmed in part from weak systems.
The 4.2 billion euros Deutsche Bank has budgeted this year to maintain and modernize its systems represents a fraction of the $11.5 billion JPMorgan Chase & Co. shells out. “You have to spend to win” with new technologies, Jamie Dimon, the bank’s CEO, said Tuesday.
The gap is set to widen as the German chief executive wants to cut technology costs by almost a quarter. European banks, meanwhile, are forecast to increase tech spending at a 4.8% annual rate through 2022, according to the consulting firm Celent.
“We continue to invest in IT to serve clients better, become safer, more efficient and better controlled,” Senthuran Shanmugasivam, a Deutsche Bank spokesman, said in response to questions from Bloomberg. “Despite our smaller footprint, our investment plans in 2019 are broadly unchanged as we reallocate resources to our core businesses.”
It’s all part of a retrenchment Sewing announced last week to exit equities sales and trading and eliminate 18,000 jobs. Deutsche Bank aims to cut adjusted costs to 17 billion euros in 2022 from 22.8 billion euros last year; the share of technology expenses would remain stable over that time period.
The company can modernize systems while spending less, for example by moving most of its applications to the cloud, according to Frank Kuhnke, who oversees its technology. He said Deutsche Bank has already cut the cost of crunching data by more than 30% since 2016 even as it increased computing capacity by about 12% a year to meet regulatory demands.
Still, Deutsche Bank needs “to make a further step change in embracing technology,” Sewing told analysts last week.
The CEO has brought in new talent to do that. Bernd Leukert, who left the management board of software company SAP SE earlier this year, will start in September. Neal Pawar will join as chief information officer from AQR Capital Management the same month.
Hiring outsiders hasn’t been a panacea in the past. Kim Hammonds, a former Boeing Co. executive, spent about four and a half years rebuilding the bank’s systems only to be ousted in 2018 after reportedly calling the bank “the most dysfunctional company” she’d ever worked for.
Deutsche Bank expects its retrenchment from businesses to allow it to focus on its core operations. It will also save about 300 million euros by 2022 by shedding almost 5,000 external IT contractors and replacing them with internal staff at a lower cost. The integration of consumer lender Postbank will avoid duplication of expenses.
The digital revolution is upending all aspects of finance — from taking deposits to bond trading, a traditional Deutsche Bank strength. Citigroup Inc. has created a fintech division to invest in debt-market technologies while Spain’s Banco Bilbao Vizcaya Argentaria SA has created a unit to automate trade processes and generate intelligence from data. Dutch bank ING Groep NV has used artificial intelligence to win 20% more bond trades and cut costs.
Cutting tech costs is also notoriously difficult.
A three-year initiative announced in 2012 failed to stop technology spending from ballooning 44% by 2015. That was the year that then-CEO John Cryan said he would reduce the number of operating systems from 45 to four in 2020. Deutsche Bank still has 26, Sewing told investors in May. He kept the goal of eventually cutting them to four, but says the lender will need to run 10 to 15 systems for the foreseeable future.
“Everyone knows that Deutsche Bank’s systems are a mess and I think they will have to end up spending more,” said Drach. “The fact that their new technology head hasn’t come on board yet gives them a good narrative for increasing the ultimate amount.”
As Deutsche Bank shutters its trading business, the German lender is doubling down on wealth management.
The firm is offering lucrative pay packages to entice a team of 13 bankers from Credit Suisse in Italy to focus on ultra-wealthy clients worth at least $30 million, according to a report from the Financial Times.
An industry insider told the FT that Deutsche Bank is paying “danger money” to bring the bankers on board by offering to match their 2018 bonuses and raise their salaries by up to 40%.
The firm announced last week that it planned to lay-off 18,000 employees amid a major shakeup that would take the bank out of the equities trading business.
Roberto Coletta, the current head of ultra-high net worth individuals at Credit Suisse’s Italy operation, is expected to run the team, the FT reported. Claudius de Sanctis, the head of Deutsche Bank’s Wealth Management practice in Europe, left Credit Suisse last year to join the firm.
According to the FT, another two senior bankers from Credit Suisse joined Deutche Bank’s London office in June. Sanctis told the FT that the new wealth management hires were made at the market price.
“We have a great story to tell and when you have great story to tell you don’t need to pay over market price,” Sanctis said to the FT.
(ZH) There is a reason James Simons’ RenTec is the world’s best performing hedge fund – it spots trends (even if they are glaringly obvious) well ahead of almost everyone else, and certainly long before the consensus.
That’s what happened with Deutsche Bank, when as we reported two weeks ago, the quant fund pulled its cash from Deutsche Bank as a result of soaring counterparty risk, just days before the full – and to many, devastating – extent of the German lender’s historic restructuring was disclosed, and would result in a bank that is radically different from what Deutsche Bank was previously (see “The Deutsche Bank As You Know It Is No More“).
In any case, now that RenTec is long gone, and questions about the viability of Deutsche Bank are swirling – yes, it won’t be insolvent overnight, but like the world’s biggest melting ice cube, there is simply no equity value there any more – everyone else has decided to cut their counterparty risk with the bank with the €45 trillion in derivatives, and according to Bloomberg Deutsche Bank clients, mostly hedge funds, have started a “bank run” which has culminated with about $1 billion per day being pulled from the bank.
As a result of the modern version of this “bank run”, where it’s not depositors but counterparties that are pulling their liquid exposure from DB on fears another Lehman-style lock up could freeze their funds indefinitely, Deutsche Bank is considering how to transfer some €150 billion ($168 billion) of balances held in it prime-brokerage unit – along with technology and potentially hundreds of staff – to French banking giant BNP Paribas.
One problem, as Bloomberg notes, is that such a forced attempt to change prime-broker counterparties, would be like herding cats, as the clients had already decided they have no intention of sticking with Deutsche Bank, and would certainly prefer to pick their own PB counterparty than be assigned one by the Frankfurt-based bank. Alas, the problem for DB is that with the bank run accelerating, pressure on the bank to complete a deal soon is soaring.
Here are the dynamics in a nutshell, (via Bloomberg): Deutsche Bank CEO Christian Sewing is pulling back from catering to risky hedge-fund clients, i.e. running a prime brokerage, as he attempts to radically overhaul the troubled German lender while BNP CEO Jean-Laurent Bonnafe wants to expand in the industry. A deal of this magnitude would be a stark example of the German firm’s retreat from global investment banking while potentially transforming its French rival from a small player in the so-called prime-brokerage industry to one of Europe’s biggest.
Of course, publicly telegraphing that DB is in dire liquidity straits and needs an in-kind transfer of its prime brokerage book would spark an outright panic, and so instead the story has been spun far more palatably, i.e., “BNP is providing “continuity of service” to Deutsche Bank’s prime-brokerage and electronic-equity clients as the two companies discuss transferring over technology and staff“, according to a July 7 statement. The ultimate goal of the talks is for BNP to take over the vast majority of client balances, which are slightly less than $200 billion currently.
There is just one problem: nothing is preventing those clients who would be forcibly moved from a German banking giant to a French banking giant from redeeming their funds. And that’s just what they are doing. Or rather, nothing is preventing them from moving their exposure for now, which is why they are suddenly scrambling to do it before they are suddenly gated.
Which is why the final shape of the deal remains, pardon the pun, fluid, and it is unclear how it will proceed, facing a multitude of complexities, including departing clients.
In an attempt to stop the bank run, BNP executives are meeting with U.S. hedge-fund clients this week to convince them to stay following similar sit-downs with European funds last week, Bloomberg sources said.
However, if this gambit fails, and hedge funds keep moving their business elsewhere, officials at the German bank may just relegate its assets tied to the prime finance division into the newly formed Capital Release Unit, i.e. the infamous “bad bank” which is winding down unwanted assets totaling 288 billion euros ($324 billion) of leverage exposure, and the prime brokerage is responsible for much of the 170 billion euros of leverage exposure that’s coming from the equities division into the division, also known as CRU a presentation shows.
It also means that countless hegde funds are suddenly at risk of being gated on whatever liquid exposure they have toward Deutsche Bank.
To be sure, Deutsche Bank’s hedge fund balances have been declining throughout the year as speculation swirled around Sewing’s intentions for the prime brokerage, but the rate of redemptions was far lower than $1 billion per day. Now that the bank jog has become a bank run, the next question is how much liquidity reserves does DB really have and what happen if hedge funds clients – suddenly spooked they will be the last bagholders standing – pull the remaining €150 billion all at once.
We are confident we will get the answer in a few days if not hours, until then please enjoy this chart which compares DB’s stock decline to that of another bank which was gripped by a historic liquidity run in its last days too…
Os juros da dívida portuguesa negoceiam perto de mínimos históricos, mas o Goldman Sachs acredita que há espaço para mais descidas, uma vez que o BCE vai comprar mais dívida do que o mercado está à espera.
O Banco Central Europeu vai arrancar em setembro com um novo programa de compra de dívida (“quantitative easing”), aplicando um total que oscilará entre 200 e 250 mil milhões de euros.
A estimativa é do Goldman Sachs e duplica as expectativas atuais do mercado, que está incorporar um programa entre 100 e 150 mil milhões de euros, pelo que o banco considera que as obrigações soberanas europeias ainda têm espaço para valorizar.
Desta forma, o banco de investimento está a recomendar aos clientes a aposta em títulos de dívida de Portugal e Espanha antes da reunião de 12 de setembro, altura em que a instituição liderada por Mario Draghi deverá oficializar o lançamento de um novo programa de compra de dívida.
O Goldman Sachs entende que reforçar as posições longas nas obrigações de Portugal e Espanha é a melhor estratégia para tirar partido da política monetária do BCE, uma vez que nos títulos de dívida de países como França, Bélgica e Áustria o “quantitative easing” da autoridade monetária já está mais descontado. Segundo o Goldman, a dívida da Irlanda também deve ser beneficiada.
“Pensamos que há mais margem” para que a dívida europeia “continue a ser suportada” pelo anúncio do programa de compra de ativos na reunião de setembro do BCE, referem os analistas do Goldman, numa nota que está a ser citada pela Bloomberg. “Tal sugere que há mais margem para um ‘rally’”, acrescentam.
O banco de investimento considera ser “exequível” que Mario Draghi, na última reunião enquanto presidente do BCE (12 de setembro), anuncie um programa de compra de dívida de 25 mil milhões de euros por mês durante nove meses.
As taxas de juro da dívida de diversos países europeias caíram para mínimos históricos depois de Draghi ter sinalizado em Sintra que o BCE iria adotar mais medidas para travar o abrandamento da economia europeia e impulsionar a inflação da região, que persiste bem longe da meta dos 2%.
O mercado incorporou que o banco central iria reativar o programa de compra de ativos e baixar a taxa dos depósitos, que já está em terreno negativo (-0,4%).
A “yield” das obrigações portuguesas a 10 anos baixou dos 0,30% na sessão de 3 de julho, sendo que desde então registou uma trajetória de agravamento, até aos 0,6% registados ontem de manhã. Esta terça-feira está de novo em queda acentuada, com uma descida de 5,4 pontos base para 0,52%.
Nos restantes países periféricos, que estão a ser beneficiados por esta nota do Goldman, a tendência é a mesma. A taxa das obrigações espanholas a 10 anos desce 5 pontos base para 0,45% e nas obrigações italianas com a mesma maturidade a descida é de 5,1 pontos base para 1,59%.
(Reuters) – The U.S. Justice Department is investigating whether Deutsche Bank AG (DBKGn.DE) violated foreign corruption or anti-money-laundering laws in its work for state fund 1Malaysia Development Berhad (1MDB), the Wall Street Journal said on Wednesday.The logo of Deutsche Bank is pictured on a company’s office in London, Britain July 8, 2019. REUTERS/Simon Dawson
The news comes after the bank announced plans to scrap its global equities unit, cut some fixed-income operations and slash 18,000 jobs globally in a 7.4-billion-euro ($8.34 billion) restructuring program.
Deutsche Bank’s work for 1MDB included helping to raise $1.2 billion in 2014 as concerns about the fund’s management and financials had begun to circulate, the newspaper said, citing unidentified people familiar with the matter.
Prosecutors are mainly looking into the role of Tan Boon-Kee, a colleague of a former Goldman Sachs Group Inc executive, Tim Leissner, who worked with him on 1MDB-related business, the paper said.
She left Goldman to become Asia-Pacific head of banking for financial institutions clients at Deutsche Bank, where she was involved with further 1MDB dealings, it added.
In an emailed statement, Deutsche Bank said it had fully cooperated with all regulatory and law enforcement agencies that made inquiries about the fund.
“As stated in asset forfeiture complaints filed by the U.S. Department of Justice, 1MDB made ‘material misrepresentations and omissions to Deutsche Bank officials’ in connection with 1MDB’s transactions with the bank,” the bank told Reuters.
“This is consistent with the bank’s own findings in this matter,” it added.
A U.S. DoJ civil asset-forfeiture complaint repeatedly describes Deutsche Bank as being misled by 1MDB officers, the WSJ said.
Tan left Deutsche Bank last year, after it discovered communications between her and Jho Low, the Malaysian financier the Justice Department has described as the central player in the 1MDB scandal, it added.
A representative of insurance company FWD Group, Tan’s current employer, said the company and Tan declined to comment.
The DoJ did not immediately respond to a request for comment from Reuters.
At the end of the day, all of the frenzied whispers in the press about Deutsche Bank CEO Christian Sewing’s sweeping restructuring hardly did it justice. Instead of moving slowly, the bank started herding hundreds of employees into meetings with HR, first in its offices in Asia (Hong Kong, Sydney), then London (which got hit particularly hard) then New York City.
By some accounts, it was the largest mass banker firing since the collapse of Lehman, which left nearly 30,000 employees in New York City jobless. Although the American economy is doing comparatively well relative to Europe, across the world, DB employees might struggle to find work again in their same field.
According to Bloomberg, automation and cuts have left most investment banks much leaner than they were before the crisis, and the contracting hedge fund industry, which once poached employees from DB’s equities business, isn’t much help. Some employees will inevitably find their way to Evercore, Blackstone – boutique investment banks and private equity are two of the industry’s top growth areas – or family offices, which, thanks to the never-ending rally in asset prices (and the return of bitcoin), are also booming.
Oh, and of course, there’s always crypto. Some evidence has surfaced to suggest that many young bankers are already looking to make the leap.
For the highest-paid employees being let go this week, many will need to get used to lower pay. Some 1,100 ‘material risk takers’ have been let go. On average, they earned $1.25 million, with almost 60% of that in cash.
“A lot of these people are going to have to get used to less compensation,” said Richard Lipstein, managing director at recruiting firm Gilbert Tweed International, in a telephone interview. And “the percentage of compensation in cash is lower than it used to be.”
Many will need to leave the street, and possibly whatever city in which they are currently living, to find work elsewhere.
“A lot of the people coming out of DB are going to be very challenged to find jobs just because of the sheer change in the equity business,” said Michael Nelson, a senior recruiter at Quest Group. “When you are dispersing that many people globally, some of those people might have to leave the business.”
But although banking headcount has never returned to its pre-crisis levels…
…at least one major Wall Street institution is looking to hire some Deutsche people: Goldman Sachs.
While BBG’s piece on the layoffs focused on the difficulty these employees may face in finding new work, Reuters described the scene outside these offices, where one insider had warned about “Lehman-style” scenes. To wit, some just fired workers could be seen mulling outside, taking photos with colleagues and splitting cabs, presumably to go to the nearest pub and quaff liquor, beer and prosecco.
Staff leaving in Hong Kong were holding envelopes with the bank’s logo. Three employees took a picture of themselves beside a Deutsche Bank sign outside, hugged and then hailed a taxi.
“They give you this packet and you are out of the building,” said one equities trader.
“The equities market is not that great so I may not find a similar job, but I have to deal with it,” said another.
After weeks of looming dread, employees were called into auditoriums, cafeterias and offices, handed an envelope with the details of their redundancy package, and shown the door. Reuters’ reporters followed some of the employees at DB’s London office to the nearest pub.
Few staff wanted to speak outside the bank’s London office, but trade was picking up at the nearby Balls Brothers pub around lunchtime.
“I got laid off, where else would I go,” said a man who had just lost his job in equity sales.
Job cuts were expansive in the bank’s main support centers, where the mood was “pretty hopeless”.
A Deutsche Bank employee in Bengaluru told Reuters that he and several colleagues were told first thing that their jobs were going.
“We were informed that our jobs have become redundant and handed over our letters and given approximately a month’s salary,” he said.
“The mood is pretty hopeless right now, especially (among)people who are single-earners or have big financial burdens such as loans to pay,” he added.
Sewing’s grand restructuring plan involves shutting down Deutsche’s entire lossmaking global equities business, cutting 18,000 jobs (roughly one-fifth of the bank’s total headcount) and hiving off €288 billion ($322 billion) of loss-making assets into a bad bank for sale or run-off. The goal of the restructuring is to reorient DB away from its troubled institutional business and more toward commercial banking and asset management.
As a JP Morgan analyst pointed out, questions linger over DB’s ability to grow, its “ability to operate a corporate franchise without a European equity business.”
Investors were also taken by surprise, which is probably why DB shares sold off again on Tuesday. Closing the bank’s European equity business as a radical step that few anticipated. Most of the leaks to the media seemed to suggest that the cuts would focus on its foreign business, particularly the troubled US equities unit.
But without an equities business, some clients might lose faith in DB’s ability to win business from large corporations. Then again, there’s also the sheer enormity of what the bank is trying to do: substantially grow revenues while cutting a huge chunk of its staff and closing whole businesses, some of which are synergistic with other businesses that will remain open.
As Daniele Brupbacher of UBS pointed out, the odds of success seem low: “Cutting costs by one-quarter while increasing revenues by 10 per cent over four years in the current market environment, while undergoing massive restructuring, could be seen as ‘challenging.'”
Restructuring costs are also probably weighing on shareholders’ minds: the restructuring is expected to produce a full-year loss. Will corporate bank head Stefan Hoops succeed in doubling the Global Transaction Bank’s pretax earnings to €2 billion over the next 2 years, and make a tangible return on equity of 15% by 2022? We guess it’s possible. We suppose it’s possible, but is it likely…
The bank which only a decade ago dominated equity and fixed income and sales trading and investment banking across the globe, and was Europe’s banking behemoth, is no more.
On Sunday afternoon, in a widely telegraphed move, Deutsche Bank announced that it was exiting its equity sales and trading operation, resizing its once legendary Fixed Income and Rates operations and reducing risk-weighted assets currently allocated to these business by 40%, slashing as many as 20,000 jobs including many top officials, and creating a €74 billion “bad bank” as part of a reorganization which will cost up to €7.4 billion by the end of 2022 and which will result in another massive Q2 loss of €2.8 billion, as the bank hopes to slash costs by €17 billion in 2022, while ending dividends for 2019 and 2020 even as it hopes to achieve all this without new outside capital.
“Today we have announced the most fundamental transformation of Deutsche Bank in decades. We are tackling what is necessary to unleash our true potential: our business model, costs, capital and the management team. We are building on our strengths. This is a restart for Deutsche Bank – for the long-term benefit of our clients, employees, investors and society”, CEO Christian Sewing said in a statement.
“In refocusing the bank around our clients, we are returning to our roots and to what once made us one of the leading banks in the world. We remain committed to our global network and will help companies to grow and provide private and institutional clients with the best solutions and advice for their respective needs – in Germany, Europe and around the globe. We are determined to generate long-term, sustainable returns for shareholders and restore the reputation of Deutsche Bank.”
In what has been dubbed a “radical overhaul”, the biggest German lender, unveiled one of the most comprehensive banking restructurings since the financial crisis, closing most of its trading unit and splitting off €74bn of its assets as the struggling German lender calls time on its “20-year attempt to break into the top ranks of Wall Street.”
“These actions are designed to allow Deutsche Bank to focus on and invest in its core, market leading businesses of Corporate Banking, Financing, Foreign Exchange, Origination & Advisory, Private Banking, and Asset Management” the bank said in a Sunday statement.
Creating a fourth business division called the Corporate Bank which will be comprised of the Global Transaction Bank and the German commercial banking business.
Exiting the Equities Sales & Trading business and reducing the amount of capital used by the Fixed-Income Sales & Trading business, in particular Rates.
Returning 5 billion euros of capital to shareholders starting in 2022, facilitated by a new Capital Release Unit (CRU) to which the bank plans initially to transfer approximately 288 billion euros, or about 20% of Deutsche Bank’s leverage exposure, and 74 billion euros of risk weighted assets (RWA) for wind-down or disposal.
Funding the transformation through existing resources including maintaining a minimum Common Equity Tier 1 ratio of 12.5%. The bank expects to execute its restructuring without the need to raise additional capital.
As a result, the bank’s leverage ratio is expected increase to 4.5% in 2020 and approximately 5% from 2022.
Reducing adjusted costs by 2022 by approximately 6 billion euros to 17 billion euros, a reduction by a quarter of the current cost base.
Targeting a Return on Tangible Equity of 8% by 2022.
Investing 13 billion euros in technology by 2022, to drive efficiency and further improve products and services.
And the key aspects of the reorganization, in more detail as published in a company press release, include:
The exit of Global Equities and a significant reduction in Corporate and Investment Banking risk weighted assets
Deutsche Bank will exit its Equities Sales & Trading business, while retaining a focused equity capital markets operation. In addition, the bank plans to resize its Fixed Income operations in particular its Rates business and will accelerate the wind-down of its existing non-strategic portfolio. In aggregate, Deutsche Bank will reduce risk-weighted assets currently allocated to these businesses by approximately 40%.
The bank will create a new Capital Release Unit to manage the efficient wind-down of the assets related to business activities, which are being exited or reduced. These assets and businesses represented EUR 74 billion of risk-weighted assets and EUR 288 billion of leverage exposure, as of 31 December 2018.
A significant restructuring of businesses and infrastructure
Deutsche Bank will implement a cost reduction program designed to reduce adjusted costs to EUR 17 billion in 2022 and is targeting a cost income ratio of 70% in that year.
To facilitate its restructuring, Deutsche Bank expects to take approximately EUR 3 billion of aggregate charges in the second quarter of 2019, of which approximately EUR 0.2 billion would impact Common Equity Tier 1 capital. These charges include a Deferred Tax Asset write-down of approximately EUR 2 billion and impairments of approximately EUR 0.9 billion. Additional restructuring charges are expected in the second half of 2019 and subsequent years. In aggregate, Deutsche Bank currently expects cumulative charges of EUR 7.4 billion by the end of 2022.
Managing the transformation through existing resources
Deutsche Bank management intends to fund its transformation from its existing resources without requiring additional capital. This reflects the bank’s current strong capital position as well as management’s confidence in the high quality and low risk nature of the assets, which it is exiting. In connection with these decisions, the Management Board intends to recommend no common equity dividend be paid for the financial years 2019 and 2020. The bank expects to have capacity for payments on additional tier 1 securities throughout the transformation phase.
Updated capital and leverage targets
The Management Board believes that the future business mix is consistent with a lower capital requirement. After consultation with the bank’s regulators, the bank now intends to operate with a minimum CET1 ratio of 12.5% going forward. As a result of the significant deleveraging actions, the bank targets a fully-loaded leverage ratio of 4.5% by the end of 2020 rising to approximately 5% by 2022.
Improving broken internal controls
Deutsche Bank is committed to investing a further 4 billion euros in improving controls by 2022. The bank will combine its Risk, Compliance and Anti-Financial Crime functions to strengthen processes and controls while also increasing efficiency. To reshape and improve its long-term competitive position, the bank will undertake a restructuring of its infrastructure functions, which include back office systems and processes that support all business divisions. These functions will become leaner, more innovative and more digital.
A separate Technology function will be created which will have responsibility to further optimize Deutsche Bank’s IT infrastructure. It will also drive the digitalisation of all businesses. This is set to boost innovation as well as further strengthen the internal control environment. The bank will make targeted investments in technology and innovation, utilising a budget of 13 billion euros by 2022.
Of course, none of the above will come for free, and the bank will incur second quarter charges related to the restructuring described above, resulting in a pretax loss before income taxes of approximately EUR 500 million and a net loss of EUR 2.8 billion. The silver lining – if one excludes all these “one-time” charges – which is ironic for the bank which has been restructuring every quarter for the past few years – Deutsche Bank expects to report second quarter 2019 income before income taxes of approximately EUR 400 million and net profit of EUR 120 million.
As the FT notes, the new strategy by CEO Christian Sewing “signals a retreat from Deutsche’s global ambitions and its aim to be Europe’s main rival to Goldman Sachs”. Instead, one year ahead of Deutsche’s 150th anniversary, Sewing is refocusing the lender on its historic roots — financing German and European corporate clients and domestic retail banking.
As we noted previously, the bank with the €43.5 trillion in gross derivatives notional…
… will be hard-pressed to ringfence all of its toxic assets in a relatively modest €74 billion silo. What is just as notable is that the use of a bad bank, an artificial crutch that was prevalent during the financial crisis and shortly after as shown in the chart below…
… confirms that many if not most of Europe’s banks are just as challenged as they were a decade ago, and only the ECB’s actions prevented the market from grasping the true severity of the situation. Which, in a sense, is paradoxical because it is the ECB’s NIRP/QE policies that made Deutsche Bank’s historic restructuring inevitable.
Finally, the bank also said that the restructuring actions will include a workforce reduction of approximately 18,000 full-time equivalent employees to around 74,000 employees by 2022. In aggregate, the bank expects to reduce adjusted costs by approximately 6 billion euros to 17 billion euros in 2022, although pink slip details are likely reserved for a more intimate context.
Most of the job losses are set to come at the investment bank, particularly the underperforming operations on Wall Street and in the City of London. Not only the rank and file will be affected: as we reported yesterday, two top executives have already departed as part of the overhaul — Garth Ritchie, investment banking chief, and Frank Strauss, head of retail banking. Sylvie Matherat, chief regulatory officer, is also expected to leave, as are the bank’s debt chiefs Yanni Pipilis and James Davies.
While it is unclear if the bank can achieve its ambitious agenda in the next 3 years, one thing is certain – the Deutsche Bank that saw RenTec close out its counterparty exposure in recent weeks anticipating what was coming – is no more, and it remains to be seen if the “successor” will be any more successful.
Bank expects to exit its equities sales and trading business
Lender sees no dividend for this year or next amid overhaul
Deutsche Bank AG will exit its equities business and post a net loss of 2.8 billion euros ($3.1 billion) in the second quarter as Chief Executive Officer Christian Sewing seeks to boost profitability and shrink the German lender’s once-mighty investment banking unit.
The lender expects restructuring charges of 7.4 billion euros through 2022 to pay for the radical overhaul and will shelve the dividend this year and next, according to a statement on Sunday. About 18,000 jobs will be eliminated in the restructuring.
About 74 billion euros of risk-weighted assets will become part of a new non-core unit and the lender’s capital buffer will be reduced as part of the plan. The bank said it does not plan a capital increase to pay for the overhaul.
The bank said retail chief Frank Strauss and Chief Regulatory Officer Sylvie Matherat, both board members, will leave this month. The departure of investment bank head Garth Ritchie was announced on Friday.
The scale of the revamp underscores the failed turnarounds by Sewing and his predecessors to solve the fundamental problem: costs were too high and revenue too low. After government-brokered merger talks with Commerzbank AG collapsed in April, the CEO had few other options to bolster market confidence. His plan was approved by the board at a meeting Sunday.
The investment bank is a key focus of the overhaul. The unit, which accounts for roughly half of Deutsche Bank’s revenue and which was a major actor in its downfall, will be broken in two. The transaction bank will be lifted out and merged with the commercial clients segment that’s currently within the retail division, people familiar with the matter have said.
The change is designed to accelerate the shift away from acting as the first port of call for institutional clients such as asset managers and hedge funds toward selling cash management, trade finance and hedging products to corporate clients. The new division, to be lead by current transaction bank head Stefan Hoops, will be at the heart of the lender’s future business model.
EU states were forced to set aside more than a trillion euros to prop up risky banks in the wake of the crisis (Photo: eba.europa.eu)
The EU’s top banks ought to keep more money in reserve, making them less profitable, in order to prevent another 2008-type crisis, Europe’s banking supervisor has said.
The bloc’s largest banks had a total capital shortfall of €135bn “under the most conservative assumptions”, the European Banking Agency (EBA) in Paris said in a report on Tuesday (2 July).
The shortfall was measured against new capital rules agreed in 2017 by the so-called Basel Committee, a global supervisory body at the Bank for International Settlements in Basel, Switzerland, which helps its 60 member countries’ central banks to work together.
It is far lower than the EU shortfall of €277bn recorded in the immediate wake of the crisis in 2009.
The crisis saw the collapse of US investment bank Lehman Brothers due to excessive risk taking.
Its knock-on effects also forced EU states to allocate €1.6 trillion of state funds in the following years in order to prop up wobbly lenders and generated political momentum for a “banking union”, which remains a work in progress.
The new Basel rules, informally called Basel IV, are due to enter into force between 2022 and 2027.
The EU’s banks ought to increase their minimum capital levels by 24.4 percent in order to comply, the EBA said on Tuesday.
The figure was a steep hike from its 2017 estimate of 15.2 percent.
But the obligation to hold on to profits instead of reinvesting them or paying them out to shareholders could make European lenders less competitive.
It could also have a cooling effect on Europe’s economy.
“Given that these banks are responsible for the large majority of lending to businesses and individuals across Europe, the requirement to hold higher capital levels could have negative consequences for the supply and pricing of bank finance,” Michael Lever, from the Association for Financial Markets in Europe, a Brussels-based trade lobby, told the Financial Times.
The EBA survey covered 189 lenders in Europe.
But it said the total €135bn shortfall was being “almost entirely driven by large globally active banks”.
Medium-sized EU banks accounted for just €5.5bn of that figure and ought to boost minimum capital levels by 11.3 percent, the EBA said.
Small banks had a €0.1bn shortfall and needed to raise capital by 5.5 percent, it added.