Deutsche Bank AG, Germany’s biggest bank, is exploring shrinking its US operations as mounting legal expenses threaten to eat into the firm’s capital, according to two people with knowledge of the matter.
Such an option is being considered as part of the bank’s broader strategy review, which evaluates businesses in the context of regulatory and capital requirements, said the people, who asked not to be identified because the talks are private.
The supervisory board of the Frankfurt-based bank discussed the US business at a recent meeting and the topic has come up in talks with US authorities, one of the people said.
Deutsche Bank said last month that the US Department of Justice requested US$14 billion to settle a probe tied to residential mortgage-backed securities, a figure that triggered a selloff in the shares and fueled investor concerns about the bank’s financial strength.
The bank had put aside 5.5 billion euros (US$6 billion) for litigation at the end of June. Chief Executive Officer John Cryan, who has been cutting jobs to lower costs, has said he does not plan to raise capital and expects US authorities to lower their initial demand.
The Sueddeutsche Zeitung, which reported on a possible US pullback on Friday, cited an unidentified person close to the bank as saying that such a move would be more likely than a sale of the asset-management business.
A spokesman for Deutsche Bank declined to comment.
The company has lost about 46 percent of its market value this year, making it the fourth-worst performer on the Bloomberg Europe Banks and Financial Services Index, which slipped 22 percent.
Cutting back the US business would affect mainly the investment bank, one of people said, because of the capital it requires. No final decisions have been made and discussions about the US business are ongoing, according to the people.
Germany’s Die Welt am Sonntag reported over the weekend that Deutsche Bank may be forced to shrink its US activities as part of a deal with the Justice Department. While talks with US authorities may include that topic, a US retreat has not been mandated so far, one of the people said.
Under US regulatory requirements, Deutsche Bank needs to have a certain amount of capital dedicated to funding its US business. Shrinking it would be one way to reduce the firm’s capital needs should the settlement with the department exceed the amount the bank has put aside for legal disputes.
Such a move would leave the bank in a weaker position in one of the more profitable markets for investment banks. Deutsche Bank had 10,842 employees in North America at the end of last year, about 10 percent of the 101,104 it employs worldwide.
Davide Serra, founder of Algebris Investments LLP, yesterday told Bloomberg Radio that Deutsche Bank needs to shrink its balance sheet by a third.
“For Deutsche Bank, there’s only one solution,” said Serra, who holds the bank’s debt, including the riskiest securities. “Shrink the balance sheet and cap the number of people. They need to cut back.”
Deutsche Bank is also holding informal talks with securities firms to explore options such as raising capital should legal bills require it.
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