Deutsche Bank's Restructuring Plan To Cost Staggering €5 Billion

After talks with Commerzbank collapsed, one of the key questions on the mind of most long-suffering DB shareholders has been 'can Deutsche even afford the type of restructuring that CEO Christian Sewing has promised?'

It appears we now have an answer - and that answer is 'no'.

According to the Financial Times, DB's plan to drastically shrink its investment banking division will not only drive the perennially imperiled German banking giant to a net loss this year (after it barely squeaked out a profit last year) and cost as much as €5 billion ($5.65 billion), according to three sources.

That's equivalent to roughly one-third of the bank's market cap.

The FT report was published one day after WSJ reported that the bank is in talks with several US rivals, including Citigroup, to sell off much of its US investment-banking business. The bank has also said it plans to lower its common equity tier-one ratio to free up more cash - but whether regulators will tolerate this remains to be seen.

The restructuring plan, which will reportedly be put before the bank's advisory board on Sunday, will involve shedding as many as 20,000 jobs, while dumping as many as €50 billion ($56.5 billion) in assets (remember all those 'bad bank' jokes?)

As a reminder, among the largest banks in the US and Europe, DB ranks dead last in terms of price to book, leaving its shareholders with little appetite to absorb more equity pain.

DB

Here are some more details of the plan, courtesy of FT.

Under the plan, the 49-year-old chief executive is aiming to cut Deutsche’s annual costs by about €4bn by 2022, according to one of the people, a sharp increase from its current target of €1bn for this year. However, the bank is not preparing to raise more capital to foot the restructuring bill, one of the people said.

Raising fresh equity would be highly dilutive to existing investors, who have seen the stock sink to a record low. A decision not to raise more capital will see the Deutsche’s common equity tier one ratio fall below its current minimum target of 13 per cent of its risk-weighted assets. The bank is preparing to announce a new minimum ratio of 12.5 per cent, a person briefed on the matter said, although the actual ratio will stay above the new target even as the bulk of the restructuring costs are absorbed. A one percentage point reduction of the ratio unlocks €3.5bn in capital.

The ratio stood at 13.7 per cent at the end of the first quarter. The European Central Bank and other regulators were comfortable with Deutsche’s new target because the ratio will still be about one percentage point higher than the regulatory minimum, another person added. Deutsche, which has 91,500 employees and €347bn in risk-weighted assets, declined to comment. 

The axe is expected to fall hardest on Deutsche’s Wall Street operations, with Mr Sewing preparing to shut the bank’s unprofitable US equities trading business and slim down its rates division, the people said. Garth Ritchie, head of the investment bank, is expected to depart in a change that will see Mr Sewing assume control of the ailing division, two people briefed on the matter said.

Those who closely followed the DB-Commerzbank boardroom drama might remember that the ECB wasn't super enthusiastic about the merger because of the capital that DB would have needed to raise to make it happen. At the time, costs of completing the merger were estimated to amount to €10 billion ($11.3 billion). Though the bank might be able to offset some of the costs of ditching toxic assets, paying out severance to fired employees and shutting unprofitable business lines by cutting its tier 1 ratio (to the extent regulators will allow this to happen), it's looking increasingly likely that DB will need to return to the well to try and raise the money needed to push the deal through.