Deutsche Bank "Encouraged" To Become Holding Company To Make Break Up Easier

With Deutsche Bank stock recently sliding just shy of all time highs, regulators, management, not to mention employees, are increasingly concerned what will happen to the bank - which not long ago was voted the world's most systematically risky bank - when the next financial crisis hits. In response, a regulatory push to make Deutsche Bank "easier to break up in a crisis" has gained traction within the firm and outside of it, as the biggest German is reportedly considering becoming "more agile to merge all or parts of itself."

According to Bloomberg, the bank was encouraged to adopt a holding company structure, which would result in the creation of three largely independent core divisions overseen by a common management board and sharing stripped-down support functions.

Even as Deutsche Bank is contemplating potential future mergers (or a catastrophic breakdown), it continues to struggle with an investment bank that has failed to compete with its peers and a retail division unable to make a substantial profit because of a bloated workforce and an over-banked local market.

Chief Executive Officer Christian Sewing announced the bank’s fourth restructuring in three years in April, mostly focused on cuts to the investment bank, though has yet to convince investors of its merits after the share price dropped almost 40 percent this year.

While Deutsche Bank’s top management doesn’t currently see the change as a top priority, many of the lender’s top executives also believe it could increase the bank’s strategic flexibility, several people said. Several representatives of large Deutsche Bank investors said they were not opposed to a more flexible structure.

The news comes amid speculation about a potential DB merger with Commerzbank, Germany’s second-biggest listed lender. The tie-up has been seen as a preferred long-term option within the bank, Bloomberg reported in June. The bank also recently was reported to be losing its largest investor, Chinese conglomerate HNA, which was ordered by Beijing to divest its various offshore equity holdings and return to its old ways of being a regional airline.

As Bloomberg further adds, Deutsche Bank has been taking steps toward a greater separation of its divisions. It sold shares in an initial public offering of its carved-out asset management arm in March and it’s also restructuring its German retail unit after merging two previously independent units into one. That will include moving back office staff into the division to make it more independent from the parent, two people said.

“The pressure to consolidate will rise significantly” in Europe, Sewing said in a speech to a conference in Frankfurt in early September. Frankfurt, where Deutsche Bank is headquartered, should play an active role if the European banking industry were to be reshaped, German Finance Minister Olaf Scholz suggested at the same conference.

To be sure, the change to a holding structure would face many regulatory difficulties, "including finding ways to ensure the investment bank can still receive funding through the group and maintain its credit rating"; however the re-valuation of assets on the balance sheet, which might result in a tax burden, would be the biggest hurdle.

Then there are the "other" challenges including employee morale which has to be sustained during another distracting structural and organizational revamp which would burden Deutsche Bank’s management and staff with yet another restructuring while they’re in the throes of merging the domestic retail units and cutting back its investment bank.

The silver lining: the bank will have an excuse to miss consensus estimates for the next several quarters, which it can blame on the biggest organizational change in its recent history, while leaving upside for potential break ups, dispositions and M&A.  That may explain why after opening lower, DBK shares have recovered all their losses for the day.