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Deutsche Bank Suffers From Litany of Reporting Problems, Regulators Said

Letter From New York Fed Said Some Reports From Deutsche Bank's U.S. Operations Were 'Inaccurate and Unreliable'

An examination by the Federal Reserve Bank of New York found that Deutsche Bank AG DBK.XE +0.85% 's giant U.S. operations suffer from a litany of serious problems, including shoddy financial reporting, inadequate auditing and oversight and weak technology systems, according to documents reviewed by The Wall Street Journal.

In a letter to Deutsche Bank executives last December, a senior official with the New York Fed wrote that financial reports produced by some of the bank's U.S. arms "are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm's entire U.S. regulatory reporting structure requires wide-ranging remedial action."

The criticism from the New York Fed represents a sharp rebuke to one of the world's biggest banks, and it comes at a time when federal regulators say they are increasingly focused on the health of overseas lenders with substantial U.S. operations.

The Dec. 11 letter, excerpts of which were reviewed by the Journal, said Deutsche Bank had made "no progress" at fixing previously identified problems. It said examiners found "material errors and poor data integrity" in its U.S. entities' public filings, which are used by regulators, economists and investors to evaluate its operations.

The shortcomings amount to a "systemic breakdown" and "expose the firm to significant operational risk and misstated regulatory reports," said the letter from Daniel Muccia, a New York Fed senior vice president responsible for supervising Deutsche Bank.

The New York Fed has various tools at its disposal to address shortcomings by banks it regulates. It can issue private letters demanding action, as it did with Deutsche Bank, or, in more severe cases, impose restrictions on banks' activities.

The letter, which hasn't been previously reported, ordered senior Deutsche Bank executives to ensure steps were taken to fix the problems. It also said the bank might have to restate some of the financial data it has submitted to regulators.

"We have been working diligently to further strengthen our systems and controls and are committed to being best in class," a Deutsche Bank spokesman said Tuesday. As part of this, he said, the bank is spending €1 billion globally and appointing 1,300 people, including about 500 compliance, risk and technology employees in the U.S. Mr. Muccia declined to comment.

The German lender's U.S. businesses, including investment banking, asset management and transaction processing, collectively account for as much as $600 billion of assets, or more than one quarter of Deutsche Bank's global total, executives say. Large portions of the U.S. operations were previously the responsibility of Anshu Jain, who today is Deutsche Bank's co-chief executive. The bank's current North American CEO is Jacques Brand. The bank spokesman declined to comment on behalf of both men.

The New York Fed's concerns also pose a challenge for Deutsche Bank's longtime finance chief, Stefan Krause, who is ultimately responsible for the company's financial figures and has been spearheading efforts to improve the quality of the bank's reporting.

The concerns from regulators strike at the heart of an issue plaguing many of the world's big banks: Some investors lack confidence in the integrity of their numbers. Such fears have been especially prevalent in Europe.

The letter sent to Deutsche Bank shows that the New York Fed's concerns about its U.S. operations have been building for years.

"Since 2002, the FRBNY has highlighted significant weaknesses in the firm's regulatory reporting framework that has remained outstanding for a decade," Mr. Muccia wrote. He added: "Most concerning is the fact that although the root causes of these errors were not eliminated, prior supervisory issues were considered remediated and closed by senior management."

Deutsche Bank's external auditor, KPMG LLP, also identified "deficiencies" in the way the bank's U.S. entities were reporting financial data in 2013, according to a Deutsche Bank email reviewed by the Journal.

Deutsche Bank's annual report and other filings have included a letter from KPMG signing off on the bank's financial statements.

A KPMG spokesman declined to comment.

Deutsche Bank's U.S. operations have been the source of regular headaches for the lender, partly due to regulatory concerns about the adequacy of its capital buffers. The bank in June raised €8.5 billion (about $11.5 billion) of new capital by selling shares to investors.

The complaints from regulators largely center on data from two big U.S. Deutsche Bank subsidiaries, and the New York branch of the German parent company. That data goes into filings that all U.S.-regulated banks file with regulators each quarter. The resulting reports, crammed with thousands of lines of densely packed data, are a trove of information for regulators, analysts and investors.

But in 2002, 2007 and 2012, New York Fed examiners voiced concerns to Deutsche Bank about the quality of the data, according to the December letter.

After conducting its 2012 annual assessment, for example, the New York Fed flagged a specific concern about how a Deutsche Bank subsidiary was classifying potentially troubled assets. The unit, Deutsche Bank Trust Company Americas, wasn't properly assessing the value of collateral when it reported the value of loans where borrowers were at risk of defaulting, according to a New York Fed letter to Deutsche Bank in June 2013. Regulators said that made the unit's reports "inaccurate."

The New York Fed's concerns intensified when a review of the bank's regulatory reporting got under way last August. At a September meeting with two of Deutsche Bank's top U.S. executives, Fed officials described the bank's reporting as the worst among its peers, according to the Deutsche Bank email about issues raised by regulators. Mr. Muccia, a 40-year veteran of bank regulation, and his team said the trust-company unit had misclassified the riskiness of 20% of its loans. Despite finding dozens of problems, the Fed team was "just scratching the surface," according to the email.

A few months later, Mr. Muccia sent his letter detailing the exam's findings and more than a half-dozen areas in need of "immediate" action.

Many of the problems stemmed from a "disjointed" regulatory-reporting system and "weaknesses" in the technology systems used by Deutsche Bank subsidiaries. Instead of automatically compiling and reporting data to federal regulators, Deutsche Bank officials were making manual changes to more than 800 pieces of data, the letter said. That data was tied to a variety of balance-sheet items, such as certain types of loans and deposits, whose values totaled about $337 billion.

Danone Weighs Expansion Opportunities Strategic Review Comes at Critical Time for French Dairy Group Dealing With Problems in China, Bigger Rivals

PARIS— Danone SA has launched a strategic review as Chief Executive Franck Riboud seeks to ensure its long-term growth, amid renewed speculation over whether the French dairy group can survive as a stand-alone company.

Mr. Riboud—who has led Danone for close to 20 years after taking over from his father—has asked top managers to explore areas of potential expansion, said a person familiar with the matter. Managers will present initial ideas at a meeting in the French town of Evian in September with a view to completing a new strategic plan by early 2015, the person added.

"There is a deep reflection about what Danone needs to do to make sure the group is still growing 50 years from now," said the person. "I would be surprised if the group kept the status quo."

The maker of Evian water and Activia yogurt is examining whether it should pursue any big deals or tie-ups to gain more heft. "The group is looking at all the options it has in theory," said the person.

A spokeswoman for Danone confirmed the strategic review. She declined to comment on the possibility of pursuing a larger deal.

The rethink at Danone comes at a critical time for the French company. Danone has been seeking to bounce back from a series of knocks over the past few years, starting with the effects of the economic crisis in Europe to a massive food safety warning a year ago that dramatically hit one of its key growth drivers, baby food in China.

"There clearly is a change in mind-set going on as management is publicly addressing the problems they are having, which they have been hesitant to do in the past," said James Targett, an analyst with Berenberg.

Danone's challenges have refocused analyst attention on its relatively small size compared with Swiss food giant Nestlé SA NESN.VX +0.80% .

After having sold off a series of noncore assets in the late 1990s and early 2000s, Danone's business today is focused on four activities: Fresh dairy, baby food, water and medical nutrition. With a market value of about €36 billion, it is much smaller than Nestlé, with a market capitalization of around €180 billion. Some people within the company say Danone may be too small to compete with such giants, said another person familiar with the matter.

At an investor seminar in June, the French dairy company hinted that it was working on a plan dubbed "Danone 2020." The group stressed it was focusing on changing the organization and cost base of its dairy business in Western Europe to improve profit margins, which have declined over the past four years. Danone also said it is working on improving its return on invested capital—a barometer of the company's ability to make profitable investments.

The group has been hurting from cost-conscious European consumers trading down to cheaper products amid the economic downturn. At the same time, the group is facing the hefty challenge of convincing Chinese parents to again trust its baby-formula brands, after a massive food safety warning from a big supplier—which later turned out a false alarm—prompted the recall of thousands of cans of baby formula across eight Asian markets last year, causing sales to tumble sharply.

Analysts expect weakness in European dairy and baby food in Asia to continue to weigh on first-half numbers due on Friday, with its profit margin expected to drop by almost two percentage points to 11.4%.

The company launched a new high-end baby-formula product under its Nutricia brand to help it regain market share in China—where it almost entirely relies on its Dumex brand, which was affected by the recall.

Danone has also taken steps to become leaner—cutting costs, shedding jobs, shutting down some manufacturing sites and shuffling management across Europe.

"The company is restructuring its business now in the way I thought they should have done two or three years ago," said Warren Ackerman, an analyst at Société Générale. "But there are so many moving parts that it is difficult to gauge exactly what strategic direction the company will take."

Danone soon could be slimming down further. The company has been in talks with several suitors, most notably Nestlé, over a potential sale of its medical-nutrition business, people familiar with the matter have said. Such a deal could fetch between €3 billion and €6 billion, depending on how much of the business the group would sell, analysts say. Danone and Nestlé declined to comment.

"What I am interested in is what they would do with the proceeds," said Mr. Ackerman.

In a recent note to clients, Natixis analysts said "pending tangible signs of change, a takeover could become an increasingly plausible scenario," with either PepsiCo Inc. PEP -0.73% or Nestlé the most likely buyers. Other analysts have speculated about Danone purchasing U.S. baby food maker Mead Johnson Nutrition Co. MJN +3.13% Danone, Pepsi, Nestlé and Mead Johnson declined to comment.

Following rumors in 2005 that Pepsi was considering a bid for Danone, France passed a law barring foreign investment in 11 strategic sectors, which became known as the "Danone law."

Some Danone watchers aren't convinced a big deal will happen this time either.

Mr. Ackerman said the group's emphasis on improving its return on invested capital after having had a rather poor track record for creating returns on previous large deals indicates a big acquisition isn't in sight as such a move would again put pressure on return on invested capital.

"Strategically, Mead would be a great move as it would boost Danone's presence in key baby food markets such as China, the U.S. and Latin America," said Mr. Ackerman. "But financially, it would be very dilutive to returns. My view is they don't need to do Mead if their Chinese baby milk business recovers."

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SAP Gives Omnicom Global Communications and Advertizing Contract 2014-07-22 17:07:58.199 GMT

By Alex Webb July 22 (Bloomberg) -- SAP has consolidated its global account for communications, advertizing, media and marketing with Omnicom, co. says in e-mailed statement.

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To contact the editor responsible for this story: Alex Webb at +49-89-24447-8802 or awebb25@bloomberg.net