Deutsche Bank has discussed adding its problematic assets to bad bank: sources

Reuters, NEW YORK

Fri, Sep 20, 2019 - Page 10

Some senior Deutsche Bank AG officials have discussed the possibility of putting additional problematic assets worth billions of euros into a unit it created earlier this year, if the bank is able to sell assets already held within that “bad bank,” three bank sources have said.

The discussions in recent weeks, which have not been previously reported, are preliminary, the sources said, adding that there is nothing imminent.

A Deutsche Bank spokesman said the bank has no plans to add additional assets into the so-called capital release unit, or bad bank.

Nevertheless, it is one of the options that has come up for discussion at the highest levels at the bank, as executives grapple with the problem of having to turn the bank around on a tight budget, the people familiar with the talks said.

Deutsche Bank needs more capital to be able to absorb the losses that are likely to come from shedding problematic assets, such as long-dated derivatives, that are still on its books, the people said.

However, after raising 29.3 billion euros (US$32.4 billion) in capital over the past nine years, it does not have room to ask investors for more, the sources added.

For investors, still nursing a 75 percent fall in the bank’s share price over the past four-and-a-half years, it means that the road to recovery for the bank is most likely to be long.

Deutsche Bank chief executive officer Christian Sewing, who took over from John Cryan in April last year, is looking to reshape the bank after a multi-year bet on building a global investment banking business unraveled.

In July, he set up the bad bank, called a capital release unit (CRU), to house 74 billion euros of risk-weighted assets that the bank had identified for wind-down or sale, part of a broader restructuring that is to see 18,000 jobs go as it exits unprofitable businesses.

Deutsche Bank set aside a 7.4 billion euro budget to fund the restructuring.

Some analysts have been skeptical whether the plan fully recognizes the extent of the problem assets still sitting on Deutsche Bank’s balance sheet. They remain particularly concerned about its exposure to Level 3 assets, which are the most illiquid and hard-to-value.

Level 3 assets, which can include distressed debt and derivatives, are not necessarily loss making.

Deutsche Bank has said that the CRU’s focus is on releasing capital rather than ring-fencing toxic assets.

In a memo to staff on July 8, Sewing described the assets within it as “high quality” and said that most were of a short duration.

Only 30 percent of Deutsche Bank’s 25 billion euros worth of Level 3 assets have so far been placed within the capital release unit, according to a presentation the bank gave alongside its quarterly results in July.

The bank set up the capital release unit with a view to shedding assets it could realistically find buyers for or wind-down in the next two to three years, the sources said.

That, in turn, would free up capital to fund the sale of longer-term assets that would require bigger writedowns, the sources said.

Of the assets in the unit, Deutsche Bank plans to run a formal auction of its equity derivatives book as soon as this month, several sources familiar with the sale process have told reporters.

If those sales are successful, the bank could move more assets into the restructuring unit, the sources said.