Deutsche Bank's Warnings Greeted by Analysts
October 08 2015 - 10:00AM
Dow Jones News
Deutsche Bank AG's â,¬5.8 billion ($6.5 billion) write-down and
bonus warning to employees are positive signs that executives are
digging in to cut costs while managing tougher regulatory
constraints, analysts said Thursday.
But analysts also warned that uncertainty over legal bills and
the long-term effectiveness of a companywide restructuring still
weigh on Germany's biggest lender.
The moves are "painful steps in the right direction," UBS Group
AG banking analysts Daniele Brupbacher and Mate Nemes wrote in a
research note on Thursday morning, adding that Deutsche bank is
"paving the way for streamlining the bank's business portfolio"
ahead of disclosing more strategy details later this month.
The German lender late Wednesday night, in disclosing the
impairment charges on its investment-, retail- and private-bank
assets, acknowledged that its dominant investment bank can't churn
out the long-term profits it once did, in large part because of
tighter regulatory requirements.
It also warned that it might trim or altogether scrap its
dividend this year.
In a memo to employees Wednesday night, new co-chief executive
John Cryan separately zeroed in on something both investors and
employees care about. The former UBS Group AG finance chief, known
for cost-cutting at the Swiss bank amid a government-led rescue,
said Deutsche Bank employees will share some of the lender's
financial pain, signaling that year-end bonuses will shrink.
Deutsche Bank said it expects a â,¬6.2 billion third-quarter
loss when it unveils details of companywide strategy plans Oct.
29.
"You have my personal commitment to try to achieve a fair
balance between staff and shareholder interests," Mr. Cryan wrote
in the memo, which was also posted on the bank's public
website.
The write-downs and other steps are aimed at helping assure
investors that Deutsche Bank, which has been beset by regulatory
missteps and shortcomings related to cost-cutting and financial
performance, is making difficult changes necessary to narrow its
focus and improve performance.
Analysts are divided on Deutsche Bank's ability to avoid raising
capital in coming months, which depends on still-unknown litigation
costs, economic conditions and the effectiveness of companywide
cost-cutting and technology and compliance initiatives.
The bank hasn't ruled out a capital raise, but Mr. Cryan said in
July, his first month on the job, that doing so wouldn't solve the
bank's fundamental expense issues and wouldn't be "in the interests
of shareholders."
Citigroup Inc. banking analysts Andrew Coombs and Nicholas
Herman said in a Thursday-morning note that Mr. Cryan is "clearing
the decks" with the big impairment charges ahead of announcing
detailed cost targets. They called the need for more capital
"inevitable," especially if litigation costs soar as they expect.
"However we think a capital increase is unlikely until 2016, after
the cost saves and strategy has been bed down," they wrote, adding
that the bank could need to raise up to €6 billion.
Goldman Sachs Group Inc. analyst Jernej Omahen said in a
Thursday note that Deutsche Bank's announcement "confirms our view
that the task facing new management is very demanding," noting that
outstanding litigation issues and the broader "'fixing' of Deutsche
Bank" will take several years to resolve.
Deutsche Bank said it was setting aside another €1.2 billion for
litigation charges. Analysts and investors view a top potential
cost—an open investigation into potential money-laundering
activities connected to the bank's Russia business—as still
difficult to estimate. The bank didn't specify which of numerous
regulatory investigations are connected to the added reserves.
Deutsche Bank shares initially fell around 7% in after-hours
trading in Germany on Wednesday night after market close following
the write-down disclosure, before regaining some ground. Shares
were up less than 1% Thursday morning.
Another challenge Deutsche Bank faces is retaining employees and
clients as it dials back compensation, trims businesses and
potentially all but pulls out of some countries. Some 18,000
employees alone are expected to be shed eventually as Deutsche Bank
hives off the Postbank retail operation it bought for more than €6
billion under former CEO Josef Ackermann in several stages starting
in 2008.
The Postbank disposal will be complicated, possibly requiring
several steps over the next couple of years, according to market
participants. Mr. Cryan said in July that Deutsche Bank "will
execute it as expeditiously and effectively as possible."
Write to Jenny Strasburg at jenny.strasburg@wsj.com and
Madeleine Nissen at Madeleine.Nissen@wsj.com
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(END) Dow Jones Newswires
October 08, 2015 09:45 ET (13:45 GMT)
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