Deutsche Bank shareholders push for sale of Postbank
Investors in Deutsche Bank are pushing for a sale of the group’s Postbank retail business as the German lender’s supervisory board prepares to meet on Friday to discuss the bank’s strategy review.
Germany’s biggest bank is looking for ways to bolster returns, faced with a combination of sluggish markets, litigation and tougher regulation that wiped 23 per cent off its share price in 2014 alone.
The bank has said it will unveil its new strategy in the second quarter and is expected to do so before its May 21 shareholders’ meeting. This will be a key moment for co-chief executives Anshu Jain and Jürgen Fitschen, whose previous targets the bank is likely to miss.
Retail banking in Germany is less profitable than in many other European countries because of fierce competition from the country’s proliferation of local savings banks and Germans’ traditional aversion to higher margin products, such as credit cards.
“[Deutsche] need to do a proper restructuring of their retail business, as the low returns there are making it very hard for them to achieve their group targets,” says Vincent Vinatier, a portfolio manager at AXA Investment Managers, one of Deutsche’s top 50 shareholders. “If they were to sell off part of Postbank, as well as their other retail businesses in the rest of Europe outside Germany, that would be quite convincing. Suddenly you would have a much cleaner story.”
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Other big shareholders have also been demanding Deutsche sell off part or all of Postbank, whose €144bn of assets generates relatively low returns but puts pressure on Deutsche’s under a new regulatory measure dubbed the leverage ratio.
Deutsche had a leverage ratio of 3.5 per cent in December, meaning it had 35 cents of equity for every €10 of assets — US banks have to increase their leverage ratios to at least 5 per cent and investors want Deutsche to be closer to the American norm. Getting to 5 per cent would require a more than €300bn reduction in the bank’s €1.7tn balance sheet, according to analysts, assuming no increase in equity.
The retail unit, which houses Postbank, managed a return on equity of only 6 per cent in 2014, giving it the worst return of the bank’s four core divisions. Deutsche has been targeting a 12 per cent return for the group as a whole by 2016.
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Deutsche bought into Postbank in 2008, but the unit has relatively little overlap with its other non-retail businesses, and some analysts reckon it is not so tightly woven into Deutsche that a deconsolidation would be impossible.
“The cost base in their retail business is almost €7bn, which is more or less where it was three years ago,” says Kinner Lakhani, an analyst at Citigroup. “That suggests that they are behind the curve on integration.”
Disposing of Postbank would deprive Deutsche of deposits that have helped to balance the wider group even though it has not been able to use excess deposits from the retail bank to finance its investment bank as originally hoped.
Under the net stable funding ratio that is part of the Basel III rule book, banks must finance their activities with sufficiently stable sources — such as retail and corporate deposits or long-term bonds — in order to mitigate the risk of future funding stress.
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Without Postbank’s deposits, people familiar with the situation say that Deutsche would need to make further heavy cuts in parts of its investment bank to still comply with the net stable funding ratio. The most likely area to be reduced would be the rates trading business and prime brokerage operations, which are both hit particularly hard by Basel III rules.
However, unlike rivals such as UBS, Barclays and RBS, which have drastically cut back their investment banking activities, Deutsche is likely to remain a big operator in the area — a stance that has some support among investors.
“Committing to investment banking is in principle the right strategy,” says Helmut Hipper, a fund manager at Union Investment, one of the 20 biggest shareholders in Deutsche. “In the good times, this is where you can make the best returns.”
Rival bankers point to the relative size of Deutsche’s investment banking business as a reason for not retreating further. While UBS had a sizeable wealth management business to fall back on, and RBS and Barclays have sizeable retail businesses, for Deutsche, investment banking is the powerhouse.
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The unit generated 43 per cent of net revenues in 2014, against retail’s 30 per cent. Its share of profits was even higher, since it makes higher returns.
“Deutsche doesn’t have a second engine,” says one rival, adding that to sustain a transformation it would be necessary to have another part of the business generating enough profits to keep overall earnings on track.
Deutsche could find its way there eventually, the banker says, if it were able to make acquisitions that would allow the bank to diversify its earnings.
With the bank’s share price trading at 61 per cent of book value, acquisitions are for now a distant prospect.
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However, Deutsche has other ways to grow. Its asset and wealth management business has become increasingly important over the past three years and, even without acquisitions, is likely to expand further.
With regulations in flux the bank’s last strategic review stopped short of making drastic changes. However, this time around investors say a more radical approach is needed.
“If by 2017 they have done a proper restructuring and they have managed a return on equity of 10 per cent, they won’t be trading at 0.6 times book,” says Mr Vinatier of Axa. “The scale of the upside is very significant. But they need to grab the bull by the horns.”